5 Ways To Take The Emotions Out Of Investing

How to Avoid Emotional Investing

There is a popular saying in the stock markets that smart traders think with their heads and not with their heart. What this means is that you must keep your emotions out of investing. But isn’t that easier said than done? Here are 5 ways you can practically keep emotions out of your investment decisions.

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1. Don’t be influenced by price ticks

It is natural for traders to get excited by price ticks. However, that is a very short term movement in stock prices and really represents nothing except random moves in price. Looking at these price ticks for too long can be counter-productive. Remember, that in the long run, the stock market is a weighing machine and not a voting machine. Value rules and mean reversion always happen; although the time may vary.

2. This time it is not different

John Templeton said that the 4 most dangerous words in investing is “This time it’s different”. Most rallies and corrections always tend to repeat. Since human psychology remains the same, these trends are very likely to repeat in the future too. The moral of the story is not to fall in love with your stocks, even if you have been holding them for a long time. Don’t just hold on to a stock hoping it would be different this time around.

3. Learn from the crowd, don’t run with it

In market parlance, running with the crowd is called herd mentality. It will not get you too far. Once you have read up the research and spoken to your financial advisor, take your own call. When you follow the herd you will only end up losing money with the herd. That normally brings you to a piquant situation. What if you feel that the crowd is right? Then go with your gut. Research and analysis works to a point. Beyond that you got to rely on your gut feel and take the decision.

4. Listen to inputs, not necessarily abide by them

Treat every piece of advice as an input; nothing more. There is nothing like a market axiom or a market truth, you have got to figure it out on your own. Ask probing questions before committing money to an investment because it is your money, after all. Especially, don’t believe if someone is trying to give you a sales pitch and throwing names of famous investors buying a stock. When you commit money to a stock, it is your money and not the advisor’s money, so don’t get carried away by their views. The buck stops with you, so as well spend time, get all the data and inputs in place and then make a decision.

5. Avoid investment decisions when excited or when crestfallen

In the Hindu scriptures, there is a famous piece of wisdom to not make promises when happy and to not take a decision when angry. That applies to investing too. Avoid making investment decisions when you are at emotional extremes. Too much joy, too much excitement or even too much dejection is never a good time for an investment decision. Investment decisions in such conditions are always likely to backfire on you.

All this sounds great on paper, but is it practically possible to keep emotions out of investing? That would depend on the person, but for all investors, there is a simple mantra. “Keep your asset allocation in perspective”. For example, if your financial plan calls for 50% allocation to equities and your equity allocation has crossed 65%; it is time for course correction. That is the best way to keep emotions out of investing.