Is Emotion Really The Enemy Of Investing?

Have you ever seen a picture of people on the trading floor, staring at the trading screens, depicting a range of intense emotions? 

Jumping in jubilation, fists pumping the air, giddy with success, – or at the opposite end of it, heads dropped into hands, mouths agape in shock, pointing fingers aggressively or frantic dialing of the phone, jabbing at the computer keys. 

All of these demonstrate intense emotions. And every time you make an investment decision, there is emotion involved there. Hope, fear, caution, confidence. So you really cannot remove emotions from investments. But the most important question is: should you? 

Impact of Emotions in Investment Decisions

BBC’s Ari Wallach recently wrote a compelling piece on how emotions are important for everything from human survival to human growth. While all of that is true, it is necessary to remember that emotions are also a pretty volatile phenomenon.  

Everything from ‘vibe’ to colors can tint human emotions. So how wise it is to let emotions play any kind of role when you are making critical financial decisions? 

A study published in the Social Behavior and Personality: An International Journal confirms that experiencing intense emotions when investing money can result in lower returns. But the truth is more layered than that. In the same study, researchers have also discovered that intense emotions, in certain situations, also yield much better investment returns. 

So, Which Is It? Should You or Should You Not Trust Your Emotions When Investing?

In therapy, you learn about ‘managing’ emotions. That’s what you will be doing here to create the perfect mix of logic and emotion to drive your stock market transactions. 

Some emotions (panic, desperation, regret) are going to be detrimental to your long-term investment goals. But then there are those emotions (patience, composure, discipline) that can help you look beyond the immediate and sense value in stocks that others are ignoring.  

Your job as an investor is to do your homework before you decide to buy a stock. During this phase of studying, do not let emotions cloud your judgments and conclusions. Let the numbers speak to you and make sense to you. Get in the mindset of understanding economic probabilities and ignore peer pressure or even financial commentators. 

None of them know anything for sure. Only you know your risk appetite and your financial personality. Keeping those in mind, conclude your research, look at the market, and let your head figure it all out.

Once you have made your investment decision, let the useful emotions guide you. Tenacity, emotional strength, and a lack of fear of missing out are some of the emotional attributes you should bank on.