Investors often find it difficult to differentiate between emotions and logic when it comes to making crucial investment decisions. While there’s no harm in paying heed to emotions, investors should be cautious about not giving them a chance to drive investments.
Circumstances like panic selling during a volatile market, over-investing in a specific asset-class, succumbing to Ponzi plans are some of the instances of emotions getting heavy over investing basics and bringing about poor results. Investors need to make peace with the fact that market highs and lows are meant to happen. Hence, panicking during such times will only adversely affect their portfolio.
As quoted by Warren Buffett, “Fearful when others are greedy and greedy when others are fearful”. Keeping in lines with the above thought, here are the top 5 emotions that frequently drives investor decisions.
Fear and apprehension are the two fundamental human emotions that play a key role in driving investment decisions. They push investors to take radical decisions during a market downturn. Investors must realise that it is absolutely normal to control and eliminate risks; however, they should never let fear affect investment decisions. The fear of losing money can become grave and lead to stalling and missing out on opportunities that will never return. Fear can be evaluated, controlled, and disposed of as long as the investor is aware of it and takes the time to investigate its source.
Any investor will reveal that uncertainty is a constant factor when it comes to investment. Always remember that the market is meant to undergo bearish and bullish phase, and shifts can happen anytime. Uncertainty is embedded in the very idea of financial investment. However, on an emotional level, it can hamper the nature of the decision. As a general rule of thumb, investors should never re-think a choice they have made, as uncertainty towards their own ability will prompt a weak investment portfolio.
Greed is another emotion that often drives investor decisions. The feeling of pushing money when the market is plummeting is proven to be a costly strategy since the investor is purchasing at a high price. They should remember the fundamentals of investing – buy low and sell high.
Depression plays a crucial role in emotional investing, as investors tend to remember their failures as compared to their successes. Investors usually get depressed when their investment bottoms out and tend to pull out funds. While investors might feel like they’re safeguarding their bags, in actuality, they are missing out on great opportunities. It’s essential to identify when to play the market; wins are usually bigger than losses.
Optimism is the feeling of being hopeful that eventually, things will turn around. However, excessive optimism can drive investors to stick onto a non-performing asset for a long time in the hope that the best is yet to come. Being overly optimistic will lead to a diminishment of the investment value. In case an asset has been continuously under performing, it is advisable to take a one-time blow and exit instead of making further losses in the hope that things will turn out to be better.
As a matter of fact, overconfidence in a particular asset class can also gravely affect investment decisions. For instance, many investors consider real estate and gold as an evergreen asset class that deliver excellent returns. However, data depicts that the 10-year yield of gold is just 8.3% at this point. Whereas, returns from real estate means investing in a bottomless pit.
Behavioural patterns and emotions can have a huge impact on one’s investment portfolio. Emotional intelligence plays a crucial role in making or breaking an investment folio, and investors must take time to harness it to their benefit. The essence of being successful as an investor is to be able to identify the right opportunities and pursuing them to get a holistic result.