If you're letting fear — or worse, greed — drive your investment choices, you could be setting yourself up for financial trouble. Here’s what you need to know about emotional investing and why it’s best to avoid getting trapped on this financial merry-go-round.
What Is Emotional Investing?
When the market is up, you buy more out of greed. When the market is low, you sell out of fear. This is known as emotional investing.
Emotional investing can be explained by the “herd instinct.” Put simply, it’s the FOMO effect, or the fear of missing out. For example, you hear a business news anchor mention that stock in a new technology company is on the rise. Then you feel an urgency to buy that stock because you think so many others will, too. It’s natural not to want to miss out on the next big stock that could yield great returns. However, basing your investment decisions on fear of missing out can be detrimental if it doesn’t align with your long-term investment goals.
The other part of the investment fear factor is losing money. Your stock may be down, but instead of staying the course, you sell, afraid you’ll lose more of your investment.
Greed is also a strong feeling that could lead you to make an emotional investment mistake. Driven by a desire to make fast cash, you invest blindly hoping for a quick return on your investment. You figure you can cash out and get rich quick. Remember, news anchors are not your financial advisor. They don’t know about your investment goals and priorities.
How to Manage Emotional Investing
So how do you avoid making emotional investing mistakes? These tips can help you take a broader view of your portfolio and put you on the path toward a more balanced financial future.
1. Prioritize Your Goals
Instead of investing emotionally, keep your short- and long-term financial goals in mind when making investment decisions.
2. Invest Routinely
Consider a routine investment strategy known as dollar cost averaging. This is simply committing to investing a fixed amount of money at fixed times. An easy application of this strategy is a biweekly contribution to your 401(k) plan. You’re investing a percentage of your income into a mutual fund, for instance, whether the price goes up or down. There’s no emotional investing at play.
3. Diversify Your Portfolio
Portfolio diversification is another way to overcome emotional investing. It’s a standard practice to help reduce the impact of market volatility. Plus, it allows you to stay focused on your long-term investment goals.
4. Meet With a Professional
Your Farm Bureau financial advisor can help you develop a sound financial plan based on your strategic goals.