Taking out emotions from your investing decisions

With all the things that have been going on today, it takes a wise and a resilient investor to make practical and well-thought of investment decisions. However, experts admit that it is human nature to emotionally react and be driven by behavioral biases whenever something unexpected happens. For instance, uncertainties in both national and international political affairs and the market’s corresponding response can trigger emotions that even an experienced investor will find it tough to handle—and this can eventually lead to reckless financial moves.

Nevertheless, being aware of these behavioral biases can be the first step in taking out emotions from your investing decisions. So what are the emotional drivers that investors like you should be aware of?

Emotions such as fear is a powerful driver that can negatively affect one’s investing decisions.  Most of the time, the fear of losing money can win over logic. One example is when investors pull out of a bear market and panic sell. One way to tame it is to remember and evaluate the fundamentals and start from there.

Confident investing is great, but overconfidence, that’s another story. Some investors overestimate their expertise especially after enjoying early successes. However, overrating one’s victory could make you vulnerable to losing money. One effect of this emotional driver is when people focus more on one asset class and take other broader factors for granted.

Another example of emotional investing is when you choose to follow the crowd instead of making your own financial decisions. If you base your strategy on how other people handle their stocks, then you’re falling for the third and most unfavorable behavioral bias in investing—the herd mentality. In addition, following the herd mentality results to the inability for investors to admit that they are responsible for the failure that they experience and readily blame other people.

For more about investing and how you can manage your portfolio more effectively, consult with a LOM Financial advisor now.