The Emotional Rollercoaster of Investing

Have you ever panicked when the market was crashing and immediately sold some or all of your shareholdings? Or perhaps rushed into the market and purchased the stock of a company that your friends, colleagues and that trusted analyst you follow recommended? If you’ve done any of this, you’re not alone. And it turns out you may have made the common yet costly mistake of emotional investing. 

What is Emotional Investing?

The psychology of investing is quite interesting. On a broad spectrum, two key emotions can lead to thoughtless investing — greed and fear. Greed drives investors to seize potential opportunities without performing adequate research, thus putting their money into assets that may be overvalued. On the other hand, fear can lead to panic selling, making investors exit potentially good positions hastily. 

The Rollercoaster of Emotional Investing: And How it Moves According to the Market Cycle

To master the skill of overcoming investment-related emotions, you need to first understand the various feelings that the typical investor feels depending on the market movement. Let’s take a closer look at how the emotional rollercoaster works. 

When the Market is Moving Upward

If you enter a bullish market, your first emotion will probably be optimism. This will likely be followed by the excitement and the thrill of rising stock prices, eventually culminating in euphoria at the market peak.

When the Market Falls

When the bullish phase ends and the stock prices begin to fall, you may start feeling anxious and remain in denial about a potential bearish phase. If the prices continue to consistently fall, denial may then give way to fear, desperation and eventually panic. This is when you may start to exit your positions and give into capitulation about the market. If you suffered losses due to panic selling, your emotions may move into the despondency and depression stage. 

When the Market Rises Again

At some point, the market will start to show an uptrend again. This is when you may emotionally feel hopeful and perhaps a sense of relief that you may be able to recover your losses. Then comes optimism, and so it begins again. 

Overcoming Emotional Investment: How to Invest Prudently in a Changing Market

All the emotions outlined above can hurt how you invest in the markets. The solution is to understand how to avoid this pitfall and invest smartly, without allowing your emotions to interfere. Here are some tips and tricks that can help. 

Focus on the Big Picture

It is easy to get caught up in the price changes of a single stock. However, to ensure your emotions do not get in the way, focus on the big picture and invest in good businesses rather than just good stocks. 

Avoid Timing the Markets

Timing the markets is nearly impossible since you can never accurately predict future market movements. Instead, invest via SIPs to increase your time in the market. This way, you need not worry about finding the right time to enter or exit a position. 

Perform Adequate Research

It is always advisable to rely on adequate research rather than mere market sentiment to guide your investments. This will allow you to choose stocks that align with your investment agenda and tailor your portfolio according to your investor profile. 

Invest According to Your Goals

Lastly, ensure that you keep the risk-reward ratio in mind before you choose stocks and other securities to invest in. Make sure that the investment horizon for your investments aligns with the horizon for your personal financial goals. 

Conclusion

The psychology of investing suggests that individuals can often succumb to various biases, leading to poor investment decisions. But the bottom line is that ups and downs are unavoidable in the market. Each market cycle goes through bullish, bearish and neutral phases. No matter which phase of the market you are participating in, you need to keep a clear head and avoid emotional investing.