Emotions and Investing

Every now and then I will struggle with keeping my emotions out of investing. I felt like as a type A personality, I would have better control in this area. Under most circumstances I am analytical, logical/rational, organized, long term planner and strategic. What took me by surprise was my somewhat quick disregard for facts, logic, reasoning, historical data and truth in this particular situation.

The human emotion is a very powerful thing. It can override all that we know including education (both formal and informal), past experience and gut feeling. It is not limited to relationships and falling in love, but affects every area of our life if not managed, assessed and disregarded as false when necessary.

Investing

Last week was the election for the next United States President. Months and weeks leading up to Nov 8th, 2016 there were countless speculations of who would win the election with both Trump and Clinton supporters and reporters giving their two cents about what they thought. Like many who were watching the news these past few months, I was shocked, appalled, disturbed, surprised among many other emotions. Even though I would not be directly impacted, as a Canadian, the decisions and policies that the United States makes do impact Canadians to some degree. Today, I only wish to address the market impact of a presidential election and how it affected me.

As an investor I was worried about the direct impact a negative decision would have on my investments. That was when the irrational thinking started. With reporters stating that Clinton as President would be better for the economy and stock market and Trump would create the exact opposite long term effect, I started to become hesitant about putting money in the stock market and began closely following the investments I already had. I forgot that if you invest with a long-term, balanced and consistent and well researched approach, you do not need to be influenced my media. This information seemed to have escaped me for a brief moment. I decided to approach my husband, a more seasoned investor than myself about my feelings and he was a bit taken back by my irrational thinking. I told him that maybe we would keep the next few monies earmarked for investing in a cash account until the ‘fog settles’. With slight disappointment, he reminded me that basing investment decisions on the next presidential elect is a purely emotional decision based on fear and speculation, the two biggest enemies that will harm your investments (the third being greed). He also reminded me that Brexit had little long term effects on the stock market even though many people were speculating otherwise. Rationally, I knew this to be true, but my feelings were more focused on the $1,000 unrealized loss in one account, or $500 unrealized loss in another account etc. days leading up to and after the election. Although we have regained much of these losses back and I have managed to shake that feeling away, there were definitely I few things I learned from this experience:

  • There is more I need to learn about investing. Yes, I have come a long way for where I was a year ago, but I also have a long way to go. Humans tend to fear what they don’t fully understand, the stock market is no different. This may explain why 60% of Canadians put over 70% of their long term retirement investments into safe investments like CDs/GICs (Money Sense). The level of confidence my husband had in the markets and the lack of confidence I had may have been due to the level of knowledge he has amassed on investing. I am fortunate to have him as a resource, but I need to make more of an effort to learn more.
  • If you don’t have a plan, then everything looks like a good or bad idea. Having a long term investment plan based on your risk tolerance and retirement goals is important. If you simply invest because markets are going up, you may be in for a world of hurt, leading you to believe that the stock market is evil because you bought high and sold low.
  • Remind yourself that you are in it for the long run. If you have a plan in place and you have done your research, short term market fluctuations or downturns should not affect your judgement. Easier said than done, but it is that simple sometimes. I think we try to complicate investing when we really don’t need to.
  • Give yourself time. My husband started reading up on investing since 2007. The housing bubble and crush intrigued his interest to learn more about investing. I on the other hand only started learning about investing more seriously in 2016. In my mind, I didn’t see the point of investing when we were pickled in $120k of student debt. Now that we set aside a sizable amount each paycheque towards our investments, it has peeked my interest. This 9 year difference in knowledge between the two of us may explain why my husband reacted with confidence and I with doubt. However, doubt without the pursuit of knowledge to overcome these doubts will turn into fear.

So I want to conclude with this, our emotions are a great tool that we can use to spot immediate danger and fight or flee. The key word to recognize is ‘immediate’ danger. If you are investing to make a quick buck, than you have missed the point. If you invest based on speculation or what is ‘going up’ in the markets then you will more than likely get burnt financial.  If you are not investing based on fear than you are missing out on solid long term returns. All of these concerns can be rectified with knowledge and the desire to learn more about what you don’t know about investing or a specific investment. This is the journey I am currently on and it has been an interesting but exciting one.

What investment decisions have you made in the past based on your emotion or feeling?

 

Categories: Investing

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