Emotions and Investing

April 26, 2012 § Leave a comment

The stock market, and investing, isn’t just the black and white of price to earnings ratios and the numbers. It’s also got a bit of emotion in it.

  Emotions– Everyone has ‘em, even professional traders. Research has been conducted that shows how stock markets around the world trade higher, meaning traders buy more stocks than they sell, when the sun is shining in their city. That’s big news for people who believe they  conduct their business from a purely mathematical perspective.

 For you and I this research on the hidden role emotions play demonstrates that we all may respond emotionally, even though it will likely be unconscious, with our money.  Your job is to mitigate emotions so they do not control you and your spending. If you could see your investing patterns or your shopping decisions in the lives of someone else, would you say, wow, that’s crazy? Or, might you say, look how steady and self-controlled they act.  How are you behaving with your investments?

 Your plan– Your financial plan, your investment plan, is the main mitigating map for you and your family regarding you money and investments. Where are you planning to go with your money? Do you want to retire early? Are you planning on someday starting a business? What specific steps for saving and investing are taking to get to that end-of-the-rainbow destination? Your financial plan is where very practical steps are mapped out to help you achieve you goals, your way. Make sure you consult your plan when you feel scared about the economy or the stock market.

 Adjustments The only way to become wise is to have life happen. You learn what risks you really can tolerate and what risks you really can’t tolerate. Maybe one sunny day when you were feeling particularly optimistic, you thought you thought a high percentage of your investments should be in developing markets. Now you may feel differently. Adjust your plan. It’s okay to modify how you will achieve you goals.

Of course I think an investment plan is easier when you have an advisor. But however you go about this, an investment plan provides protection from emotional investing and has an anchoring effect in changing economic conditions.

 

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