How to Take the Emotion Out of Investing
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Living frugally calls us to make decisions based off of reason rather than emotion. This is easier said than done. The stock market itself is driven by 90% emotion and only 10% reason. When we talk about losing money in the stock market, it’s not “if” but “when.” Investing in the stock market can be done successfully, but is best guided by keeping emotional swings in check. Don’t let the risk of losing money derail your investment plans and hinder long term growth.
Set An Investing Plan
Most investing is done over decades and follows a carefully constructed plan. Whether you put pen to paper or type it out, a formalized plan will help you immensely. Think of this as a mile post to mark your investment plan by. If there is a certain percentage you feel comfortable losing state that; if there is a percentage of income you want to derive from the investments, notate that.
If there is a certain amount you plan to invest each specific period (Dollar Cost Averaging) notate that. The point is to write down what plan you want to follow. Having such a plan in place can make the separation of emotions and investing an easier process, and your portfolio will thank you for it in the long run.
Do Your Own Research
You worked hard for your money, why not make it work best for you? When you buy a car, do you research what kind to buy? There are many things to look at such as safety, gas mileage and comfort. If you move to a new city you’ll do similar research on the best neighborhoods to live in and which area has the best schools. Investing in the stock market is no different. If you don’t know where to start, try these avenues:
- Read the business section of your newspaper
- Watch the news and listen for companies that are bringing out new products
- Google “stock market news” and look for what companies are mentioned
Now you might say that I don’t have the time to manage my portfolio and I’ve hired someone to do it for me. That’s great, but handing over the management of your investments to a “professional” does not release you from the responsibility of doing research. In such a situation, doing your own research will help you be more active in the management and keep track of what they’re doing. In the end it’s about education and staying on top of what your money is doing. More education will breed more confidence which will make it easier to decrease emotions.
A common feeling for many in the market is to check their performance regularly, almost too regularly. Checking up on your portfolio’s performance is fine and expected to a large extent. That is not what I am talking about here. Avoid checking multiple times a day. Giving in to the felt need of constant checking will only wed emotions to your investing and tempt you to make a decision you might not make otherwise. A recent study showed that while the S&P 500 returned 8.4% annually from 1989 to 2008, the general stock investor returned only 1.9%. That is a huge difference and taken over many years can have devastating effects on a portfolio. This difference can be pointed back to one main culprit – emotion.
Don’t let fear or the rush of a potential gain dictate your investment strategy. Learning how to separate your emotions from your purchase and investing decisions will help you achieve your goals and invest with confidence, which is a hallmark of frugality.
How do you keep your emotions from taking over while investing? Do you like to invest in the stock market, or does it keep you up at night?
John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.
Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.
Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.