Emotional investing

It is often quoted, “An investors worst enemy is not the market but his or her own emotions”. There are numerous theories which attempt to explain how investors react to regret or overreact when buying or selling their investments. Many times, their reasoning is based on the level of stress which leads to fear and excitement. This in turn leads to chasing performance and not diversifying, switching in and out of investments often at the wrong time, and feeling misplaced loyalty to a company, country, or region.

The most common signs of emotional investing.

• Trying to time investments. Some investors listen extensively to talks at ‘lymes’ and other functions, or on the golf course, about opinions on the timing for investments. This can lead an investor to move to the side-lines waiting to exit or enter the market at the “right time”. This is difficult because no one can accurately predict the market. The emotional fears of deciding when to hold or buy often result in missing opportunities, especially if you factor in devaluation of the currency and trying to offset inflation.

• Constantly checking prices and losing sight of long-term objectives. Some investors in long term investments like mutual funds, unit trusts and bonds will suddenly panic and start checking on the value of their investment every single day if their portfolio dips even if the performance is on track and above where you initially invested. Your long-term portfolio strategy, which was agreed on at the onset, now turns into a short-term investment all because of fluctuating prices leading your emotions to affect your decision making. It is important to maintain your expectations and goals, be realistic, and to stick to your objectives. By maintaining realistic expectations and looking at the fundamentals of the companies you are invested in, you will have the discipline to ignore short term distractions and not get anxious.

Emotional investing can trigger less than ideal reactions, like avoiding risks completely which can result in the biggest risk for your long-term goals as you miss out on opportunities or earn lower returns. As a matter of fact, the biggest risk may not be the market fluctuation; but our reaction. Before acting on emotions and responding to the present market condition and your portfolio’s performance take a deep breath, relax, take a time out and make a call to your financial advisor - we are here for you!

Lisa Minto is the Assistant Vice-President, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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