Manage Your Investing Psychology

We live in an emotional world because we’re emotional beings. Everything around us is geared towards evoking emotions.

We’re constantly bombarded in our homes, our cars, our workplaces, the places we visit, and so on with sights, sounds, and even smells meant to stir certain feelings and thoughts – all to move money out of your pockets and into someone else’s.

Marketers and businesses know that we’re emotional beings. 

That’s why they put images in your head to target your emotions to make certain buying and financial decisions. They’re everywhere – on your phone, on your TV screen, on your radio.

They want your money, and they know that emotion is key. They only have a few seconds to touch a nerve, so they’re going straight for your emotions. Appealing to logic takes too long and doesn’t sell.

Life insurance companies want you to imagine your family on a street corner panhandling after you die if you don’t buy life insurance. Dating sites want you to feel the joy of finding true love. Porsche wants you to experience the exhilaration of speeding down the highway with 500 rumbling horses under the hood.

In the ’80s, there was a gag advertisement on Saturday Night Live for Volvo cars. “Volvo.…boxy but reliable” was the punchline. That’s funny stuff, but in real life, logic doesn’t sell. Emotion does.

Emotion may be harmless in choosing your next car, but when it comes to investing, it can be detrimental. 

Dotcom euphoria drove investors to snap up dot-com IPOs in droves. The Internet was where society was headed; people told themselves. The only way was up. This was never going to stop – until it did. The dot-com bubble wiped out wealth in a matter of weeks.

The problem with emotional memories is that they’re short-lived. 

How many times have people broken up with someone only to make up the next day and keep doing it over and over again? Emotional investors are no different.

After the dot-com bubble, it wasn’t long before they were right back at it with mortgage-backed securities before subprime mortgages blew up in everybody’s faces in 2008. Once again, investors were high on these securities. It was never going to end – until it did. Again.

The problem with emotions is that it makes us biased. 

We tend to believe what we want to believe. Logic says you should run from a potential mate that’s unemployed and living in his mother’s basement. Still, emotion may cloud your decision making and makes you biased towards great hair, a killer smile, or flattering words.

Bias driven by emotion in investing can be detrimental, and it can drive us to make huge mistakes. The recent economic crisis due to the COVID-19 pandemic is triggering a lot of anxiety in a lot of investors and driving them to make decisions that they will regret later.

It’s easy for emotions to take over in these situations. Even though your head tells you that just like past crises, this too will pass, it’s easy to get caught up in all the turmoil. All kinds of thoughts and emotions course through your body. You start thinking about retirement and whether you’ll have enough to last. Do you cut your losses?

History and logic will tell you the recent downturn will correct itself, but it’s hard to keep a calm head when everybody else is running for the exits.

The run-on toilet paper is a perfect example of letting emotion and panic take over. Although toilet paper manufacturers have come out and said that there’s no need to worry about toilet paper supply or need to hoard toilet paper, this hasn’t stopped shoppers from emptying store shelves.

You may be one of those people not worried about toilet paper, but you feel like you have no choice but to stand in line at Costco on the day of a toilet paper shipment because everyone else has made it impossible for you to sit back. The thought of running out of toilet paper stresses you out.

Like a person taking anger management to control their emotions, investors need to manage their investing psychology – especially when it’s tested in a time of crisis.

The person in anger management is counseled to remind themselves of the consequences of acting on their emotions when confronted with conflict. That’s because if they give in to emotion, they’ll do something they’ll end up regretting.

Investors who give into emotion in a downturn almost inevitably end up doing something they regret. 

The biggest mistake investors can make in a downturn is to follow the mob and sell at the bottom of the market – leaving a massive hole to dig out of when they wait for the market to correct itself.

The problem is the same emotions that drove you to sell at the wrong time will also drive you to wait too long to get back in the game. Waiting to feel warm and fuzzy about the market before re-entering will only leave you that much further behind on the road to recovery. Unfortunately for those approaching retirement, there’s not enough time to recover.

Managing your investing psychology is not only recommended but vital to creating and preserving long-term wealth. 

If you have a long-term plan and set up precautions to ensure survival through downturns, you’ll be able to keep your emotions in check and ride out any market correction or bear market. You may even find opportunities to double up on certain investments instead of withdrawing.

The worst thing investors can do in a crisis is to give in to emotions and sell low and buy high. There’s no harm in re-balancing or reassessing your investments but to quit and to return later to do the same thing, but this time from behind the eight ball is a recipe for disaster.

For those staring down a recession, stick to your long-term goals, and stay the course. Consider other asset allocations – may be ones that will insulate you further from future downturns, but don’t sell when you know the market is going to rebound.

Even if you’ve given in to emotion and find yourself at the bottom, don’t make the mistake of waiting – especially if you’re close to retirement. You don’t have the luxury of waiting. Readjust, but don’t quit.

If the road ahead or the road back seems daunting – reassess. Consider pivoting your investment choices – a reallocation. 

Consider investing in recession-insulated assets – ones not tied to Wall Street. For some investors heavily into alternative assets, the recent market downturn had no effect on them. That’s because they made it impossible for themselves to sell at the wrong time.

Alternative investments like recession-resistant, income-producing real assets have lock up periods that save investors from themselves. They’re forced to stay the course. There’s nothing wrong with that. It’s human nature to panic, and some investors aren’t immune from panic, but if they can’t act on the panic, then they’re just as protected as the investor who stays calm.

Think of the person trying to lose weight who padlocks their fridge and gives the key to their spouse so they can’t give in to temptation. That person is going to be prevented from eating just the same as the person with will power.

We’re emotional beings prone to making bad decisions based on feelings. 

Emotions can cloud our investment decisions and drive us to making huge financial mistakes. That’s why it’s important to manage your investing psychology. Absent that, take the emotion entirely out of your investments.

Long-term, illiquid investments unconnected to Wall Street take emotion completely out of the equation because even amid a panic attack, fortunately, there’s no way for an investor to sell-off. That’s a good thing because everybody knows that when the dust settles, the market always rebounds after a downturn.

Kyle