Actively monitoring a portfolio is important when navigating the financial markets. However, a different kind of control is necessary when it comes to controlling the behavioral impulses of emotional investing.
To avoid being too emotional when investing, the key is to understand the motivations behind emotional investing and avoid both euphoric and depressive investment decisions.
Investor Behavior
Investor behavior has been the focus of many studies and numerous theories attempt to explain the feelings of regret or overreaction investors feel when trading.
In truth, the investor’s psyche can overwhelm his rational thinking during the times of stress. Taking a rational and realistic approach to investing is essential.
Bull vs Bear Markets
Bull markets refer to periods when markets move up continuously and sometimes indiscriminately.
When this market rages and there’s great exuberance among investors, they might see market opportunities or learn about the investments of others. This might compel them to test new waters.
The excitement, then, might lead the investor to try to obtain gains from investments emerging due to bullish market conditions.
In the same manner, when investors read or hear bad news about how volatile or negative the market is, the fear they feel for their investments can fuel market selling.
Bear markets are always just around the corner.
Most of the time, bear markets evolve from an environment of rising interest rates spurring risk-off trading and a transition from riskier investments to low-risk savings products.
Bear markets are tough to navigate when investors see equities holdings losing value while safe-haven assets become more attractive because of their rising returns.
Wrong Timing
Emotional investing is also an exercise in bad market timing. Following the media can be an effective way to know when bull or bear markets are evolving since the daily stock market reports feed off the activity occurring through the day.
On the other hand, media reports can also be outdated or even non-sensical based on rumors.
In reality, the individual investors are accountable for their own trade decisions. That means they have to be cautious when trying to time the market based on the latest headlines.
Using rational and realistic thinking to understand when an investment might be in a development cycle is the key to evaluating interesting opportunities and resisting bad investing ideas.
Taking Out Emotional Investing
There are two most popular approaches to investing. They are dollar-cost averaging and diversification. And they take a lot of the guesswork out of the investment process. They also reduce the risks of poor timing because of emotional investing.
Dollar-cost averaging is where equal amounts of dollars are invested at a regular, predetermined interval. The approach can be implemented in any market condition.
In a downward trending market, investors are buying shares at lower prices. Meanwhile, during an upward trend, the shares held in the portfolio are having capital gains. And since the dollar investment is fixed, the investor buys fewer number of shares.
Diversification, meanwhile, is the process of buying an array of investments instead of just one or two securities. They can also help diminish the emotional response to market volatility.
The key to success is awareness. That’s why you need to go and check Finance Brokerage educational websites available. And you can choose the one that suits you the best in the Online Trading Courses offered.
