Break the Cycle of Emotional Investing

Break the Cycle of Emotional Investing

Emotions can be a great asset in life, but when it comes to investing, they may be a liability. In volatile times, equity investing can feel a lot like riding an out-of-control roller coaster. There’s the thrill and excitement when the market goes up, but also the fear and panic when it falls. As emotions increase in intensity, many investors forget that the equity market tends to move in cycles. Instead, they focus too much on short-term returns, leading them to feel overconfident in bull markets and despondent in bear markets.

These strong emotions can cloud an investor’s judgment, resulting in costly mistakes, such as buying at the market’s peak or selling just before the market rebounds. An experienced financial advisor can help you navigate the emotional ups and downs of investing in today’s market. He or she offers knowledge, expertise and third-party objectivity that can help you create a customized investment strategy that can take the emotions out of investing.

A financial advisor can help you overcome emotions by building an investment strategy that keeps you focused on long-term goals rather than short-term returns.

Emotional Cycle of Investing

Help enhance your portfolio’s return potential by avoiding key emotional mistakes

Research conducted by Dr. Daniel Kahneman, one of the founding fathers of behavioral economics and the only psychologist to ever win the Nobel Prize for Economics, suggests that:

  • When faced with uncertainty, investors tend to make decisions based on their emotions and subjective experiences, not on logic or objective reality.
  • As a result, investors can easily make the wrong decision for their individual situation.

Emotions Rollercoaster

By working with a financial advisor and understanding the most common emotional mistakes that investors make, you’ll be better equipped to ride out the market’s volatility and stay on track with your financial goals!

Note: The quote is taken from Daniel Kahneman: The Thought Leader Interview by Michael Schrage, Strategy + Business, Winter 2003. Information on Daniel Kahneman’s research can be found in publications such as Judgment Under Uncertainty; Heuristics and Biases by Daniel Kahneman, Paul Slovic and Amos Tversky (Editors), New York: Cambridge University Press, 1982; and Prospect Theory: An Analysis of Decision Under Risk by Daniel Kahneman and Amos Tversky, Econometrica, 1979.