The investment landscape can be volatile and difficult to understand. But investing is a phenomenal way to add to your financial portfolio. The one thing it isn’t, though, is sentimental. That’s why factoring emotions into the way you manage your investments puts you at a high risk for making poor decisions and racking up losses.
Disregard personal attachments
Investing in a stock because you like a particular product or service is an easy trap to fall into. Unfortunately, it’s also one of the first things financial advisors tell you to avoid when you enter the market. Financial Symmetry writer Chad Smith also warns against holding on to stocks out of a sense of obligation to a company you or a family member have a connection to, since it can actively stop you from building a diverse portfolio.
For the same reason, Meredith Briggs, a financial planner with Taconic Advisors in New York, strongly advises against holding on to an investment because you have an emotional attachment to it. The most common way this situation arises is when a relative buys you stock as a gift or leaves it to you as an inheritance. “People often get ‘married’ to a stock or hold onto an investment because it has some personal connection to a family member or investment hunch,” she said. “When it comes to your personal finances you have to carefully manage risk, and that often means ignoring what your heart says and listening to your head.”
Let the news inform you, not influence you
Another important thing to keep in mind is that investing requires playing the long game, and it tends to punish impulsive actions. While it’s a good idea to stay abreast of current events—especially in regards to stories that could directly impact your investments — you can’t let the news send you into a panic. If you act without thinking, you run the risk of selling your stocks at a loss, only to find that the price rose soon after.
Instead, Chad Smith suggests, “use the information along with other resources to make educated investment decisions that align with your financial goals and strategy.” Similarly, Meredith Briggs warns that “investing isn’t a popularity contest.” In other words, just because headlines indicate something positive about an opportunity doesn’t mean you should immediately jump on it. Instead, pause, evaluate how it would complement your existing portfolio, and consult with your financial adviser.
Balance overconfidence and fear
Overconfidence, whether in a particular investment opportunity or your own intuition, can be potentially disastrous. It can lead to rash buying decisions that haven’t been fully thought through, as well as ill-considered sales. Fear can similarly result in panic-fueled sales, and can also freeze you in place, meaning you’re holding onto losing stocks. Either way, the likely result in an unbalanced portfolio that could end up costing you money.
The best practice is to find the perfect spot between the two, where you aren’t afraid to act but aren’t overzealous in your decision making. Chris Muller, a financial writer for Dough Roller, describes this as “feeling comfortable” with your investments. That comfort comes from knowing that you have a holistic view of your financial plan, and aren’t making snap decisions.
The way you manage your finances is entirely up to you, but when you’re looking at investment opportunities, it’s best to forego emotions. For expert advice on the best way to manage your portfolio, consult your trusted financial advisor.