Ep.8: EMOTIONAL INVESTING
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Hello and welcome back to Money Matters where I help guide you in becoming a better and more confident investor!
In this video I wanted to talk about the emotional side of investing. When Markets go down our human fear instinct kick in and makes us feel like and make us feel that we need to do something to stop this loss! Our fear instinct is one of if not our strongest emotion that has been seventy thousand plus years of conditioning going back to keeping us alive throughout human evolution which is why it still exists today. But instead of helping you protect yourself against a Sabre Tooth Tiger this fear shows up and protects you in different ways.
Anyone who takes on investing knows the risk-reward paradox they are signing up for ahead of time. Knowing that yes markets go up and down, and the yes there’s a risk, which is why there’s a reward to investing. Yet, emotionally investors still have a hard time staying emotionally rational and calm when markets start to go down. Most investors I talk with know that the general idea is to buy low and sell high, yet I continue to see the exact opposite as investors become tangles up emotionally with their investments which the fall into the emotional cycle of investing looking something like this - Investors start out optimistic and as they watch their stock increases they become happy with the results. Then as stocks go down then become nervous as they continue to watch, and as the news sells fear, their nervousness turns to fear! This is the point I see a lot of bad decisions take place, often times in selling of their investments. And after the selling takes place and markets rise, they become optimistic again and buy back into their stock positions.
In the book Thinking Fast and Slow by Kahneman and Tversky, they talk about this idea of loss aversion and how we feel twice as much pain in a loss than we would in pleasure of a gain in the same size. This look into behavioral economics causes us to make very poor decisions when markets go down for people feeling like they need to do something to stop the pain of their loss. Remember when you're investing this loss is only on paper! You still own the same number of shares whether stocks prices are down or up! It only becomes a real actual loss if you were to sell your investments in a market pull back, or recession.
In the same way, rising stock prices tend to evoke feelings of excitement which is when I see people wanting to buy in at the high prices and not miss out! This adds to people consistently adding to sock positions when the market is up and selling their stock positions when the market is down. This is the exact opposite of what you want to do when investing. Next time when markets are going down I challenge you to be excited about paying less for shares of publicly traded companies in the same way we get excited about black Friday or Cyber Monday - when clothes, electronics, and appliances go on sale we run out and make purchases! Take this same approach with investing instead of letting your loss aversion kick in and start selling your positions.
Any time the market goes down more than 10% I am investing more into my systematic investments because I feel good about getting the best companies in the world at a discounted price. Makes sense to Warren Buffet, and in turn makes sense to me. Staying disciplined through rising and falling markets is a challenge, but you must master this for long-term success. Historically markets reward those who have stay invested over the long-term providing positive returns for those who have stayed invested. I hope this helps with your emotional side of investing and as always thank you for giving your finances the attention that they deserve!
