When it comes to our money, most of us like to think we’re rational creatures.
We like to think that we make decisions based on sound judgment and careful consideration of the facts at hand.
But the truth is, sometimes our emotions can get in the way of making good financial decisions. In fact, a lot of times our emotions are what drive our investment choices. And that can lead to some pretty costly mistakes.
How Emotions Can Get The Better Of Us When Investing or Trading Stocks
When it comes to investing in stocks, there are a lot of emotions that can come into play. Fear, greed, hope, and even regret can all affect our decision-making. And often times, these emotions can lead us to make some pretty poor investment choices. Here are some of the most common ones:
Fear
Fear is one of the most powerful emotions when it comes to investing. It can cause us to make some pretty irrational decisions.
One of the most common, but rarely mentioned examples is the fear of investing altogether. This is usually the case for people who don’t know the difference between investing and gambling, who see others experience heavy losses and think that it will happen to them as well.
But fear can also cause us to make other bad investment decisions. For example, let’s say you own a stock that has been losing value for several months. The natural inclination is to sell the stock and cut your losses. But if you sell out of fear, you may be selling too early and missing out on a rebound.
➜ Related Post: What Separates True Stock Investors/Traders from Mere Gamblers
Fear Of Missing Out (FOMO)
One of the most common emotional mistakes investors and traders make is buying into a stock after it has already had a big run-up in price. This is often driven by the fear of missing out on a good thing. We see a stock that has gone up a lot in price and we think, “I need to get in on this!”
But what we fail to realize is that when a stock has already had a big run-up, it is often overvalued and due for a correction (i.e. about to reverse course). By buying into the stock at this point, we are often buying at the top and setting ourselves up for a loss.
Greed
Another emotional mistake that investors make is holding on to a stock for too long after it has already made them a profit. This is often driven by greed. We see a stock that has gone up in price and we think, “I’m not selling this until it goes up even more!”
But what we fail to realize is that once a stock has made us a profit, it is often time to sell. By holding on to the stock, we are often letting our greed get the better of us and putting our profits at risk.
Hope
Investors can sometimes hold on to a stock for too long after it has already lost them money. This is often driven by hope. We see a stock that has gone down in price and we think, “It has to come back up eventually, right?”
But what we fail to realize is that sometimes a stock will never come back up. By holding on to the stock, we are often letting our hope get the better of us and putting our money at risk.
While you might be able to rationalise that it’s “not a loss until you actually sell,” the fact is that money could be put to better use – perhaps in another opportunity that could offer better returns instead of staying stagnant.
Regret
Selling a stock too soon after buying it is another emotional mistake that investors make. This is often driven by regret. We see a stock that has gone down in price and we think, “I knew I shouldn’t have bought this! I’m getting out now before it goes down any further.”
But what we fail to realize is that sometimes a stock will rebound after a dip. By selling too soon, we are often letting our regret get the better of us and missing out on potential profits.
Envy and Jealousy
Last but not least, investors can sometimes make emotional decisions based on envy and jealousy, which are closely linked to the fear of missing out. We see a friend or acquaintance who has made money in the stock market and we think, “I want to make money like that!”
But what we fail to realize is that oftentimes, the people we are jealous of got lucky. They may have bought a stock that went up by chance and sold it before it went back down. Or they may have just been in the right place at the right time.
Jealousy and envy are two of the most dangerous emotions when it comes to investing. We often make impulsive decisions based on these emotions, without thinking about the risks involved.
How To Avoid Emotional Mistakes When Investing or Trading Stocks
If you find yourself making emotional decisions when it comes to investing, take a step back and ask yourself if you are really thinking about the risks involved. Oftentimes, it is best to wait until you have calmed down before making any decisions.
Investing is a marathon, not a sprint. It is important to think about your long-term goals and objectives, and to make decisions accordingly.
One of the best ways to avoid emotional mistakes when investing or trading stocks is to have a trading plan. You need to know what you’re doing before you do it. That means doing your research, setting clear goals, and having an exit strategy.
➜ Related Post: The 9-Step Recipe for a Successful Investing/Trading Plan (Let’s Create One Together)
You can also take steps to ensure that you are mentally and emotionally prepared for the ups and downs of the stock market. This includes maintaining a healthy lifestyle, diversifying your investments, sticking to smaller position sizes, and staying informed about the markets.
Make Decisions Based On The Data, Not Your Emotions
It is also important to make decisions based on data, not your emotions. When you are making investment decisions, be sure to look at the facts and figures. Pay attention to trends and patterns. And always remember that past performance is no guarantee of future results.
If you find yourself getting emotional about a stock, ask yourself if you are really looking at the data. Are you basing your decision on facts, or are you letting your emotions cloud your judgment?
The bottom line is that you need to be aware of the role that emotions can play in investment decisions. By being mindful of your emotions, you can avoid making impulsive decisions that could jeopardize your investment portfolio.
If you’re unsure of what data to look at when making decisions with your investments and trades, you can check out these 2 free resources to help get you started:
- The first is our FREE 10 Stock Criteria Checklist, which helps you identify what I consider to be the financially strongest 1% of stocks in the market at any time in less than 5 minutes. Click here to learn more.
- The second is our FREE 90-Minute Online Masterclass, where I’ll show you how I personally anticipate market crashes in advance and prepare for them. Click here to learn more if you’re interested.
Be aware of your emotions when investing and trading, and do what you need to stay neutral and detached from your decisions.
Terry
