Investor emotion can be a dangerous thing. Without insight, knowledge, and setting parameters and limits, emotions can flood even the sharpest investor.
A key is to remove as much of the emotional component as you can (setting limits, stops, etc).
How do investors lose to emotion?
Euphoria leads to Confidence: A buyer jumps in and feels emotionally confident they’re going to experience a win.
Denial leads to Fear: If a stock price drops, investors lose out to emotion when they double-down and increase their position at a “bargain price.”
Panic leads to Capitulation: The investor has already held on too long and the agony becomes so great they may finally jump out at rock bottom.
Agony and Depression lead to Disinterest: The once euphoric investor has now been hurt by the experience badly enough they may not want to give it another shot. Giving up or giving in is the worst way an investor can lose out to emotion. We’ve all made investment mistakes–we would be wise to write them down and learn from them.
Here’s the best way to learn, respond to, and protect from emotional investing:
- Begin with a small amount
- Have realistic expectations
- Learn from failures
- Invest in what you know
- Try to not let emotions drive you
Don’t be discouraged if you’ve lost out to emotion while investing in the past. Learn from it! Be confident that you won’t make the same mistake again, and start out with a small amount if you’re jumping into new territory.