Emotions You Must Control While Investing

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Important emotions to understand and control while investing are:

Fear of Loss:

Psychologically, losses have been found to be much more powerful than gains.

Put differently, the joy derived from a gain is much smaller than the pain experienced from a loss.

The pain of loss causes investors to hold on to their losers even if an investment has little to no chance of going up again in order to avoid recognizing their loss.

Similarly, fear of loss causes people to quickly lock in profits for fear that these profits may be lost which limits their upside potential.

Basically, fear of loss often causes investors to sell winners and hold on to losers.

Even worse, an investor with a loss is likely to choose exceedingly risky investments in order to make up for their loss.

To counteract the negative effects of the fear of loss:
Have a long-term mindset
Don’t evaluate your investments too frequently
Make buy and sell decisions based on the fundamentals of your investments. Ignore the profit and loss score sheet.

OverConfidence:

People have a tendency to overestimate the power of their intuition and reasoning abilities.

The reason why it’s important to not overestimate your skill level is that overconfident investors overestimate the expected gains from their trading and as a result, they trade too much.

To counteract overconfidence, make sure you review your trading activities to recall winners as well as losers.

You should also review past investment decisions in order to both identify mistakes as well as what worked well and merit reinforcement.

Self-Control

Lack of self-control stems from an inability to delay pleasure.

People want their dopamine rush now and they’re willing to miss out on larger future benefits in favor of not having to wait.

Lack of self-control will not only hinder your investment performance but your ability to achieve any of your long-term goals.

Lack of self-control causes investors to do things like:

Take on excessive risk in hopes of achieving high returns quickly
Not save the required amount to reach their financial goals. Later, this may cause the person to take on huge risks with their money in order to make up for their insufficient savings.
Cash in retirement savings early in order to support unnecessary consumption.

Things you can do to obtain a greater degree of self-control:
Write down your financial goals and make a plan on how to achieve them. Then reward yourself periodically for sticking to the plan.
Remove temptation. As I mentioned if you’re Robinhood app is winking at you every time you look at your phone, luring you to make a trade then delete the damn thing.
Don’t give up on yourself. When you do something out of lack of discipline, acknowledge it and then try to exhibit more discipline in the future.

Regret:

Regret: is the feeling that an opportunity has been needlessly missed and is typically associated with hindsight bias.

Hindsight bias happens when past events are seen as more predictable than they actually were.

One way of counteracting the fear of regret is to work on diversifying your investments so that if anyone of them doesn’t turn out as expected, the loss isn’t great and the regret is minimal.


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