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How To Control Emotions While Investing

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

When you are investing, you do not have to be right you just need to make money. When you make an investment, you may feel like you must check your portfolio. Most investors recommend that you should not look at your portfolio anymore than quarterly. The idea is to control your emotions and control your financial decisions.

When I first invested into stocks I checked every day because I was excited. That excitement quickly turned into dread as there were some losses. However, the money I lost just came back with a little more on top of that. It had been three weeks. The differences in my portfolio were too small to have any major financial consideration for. I feel embarrassed for feeling these emotions, I could have listened to these emotions and taken a loss.

Emotions Can Affect Investing

Emotions can easily hinder investing. Many have heard of a term called loss aversion. It states that the emotions caused by losses in finances are greater than the emotions caused by gains. In other words, your feelings will be more extreme from losses than they do from gains to try to avoid losses.

While loss aversion was one of the leading findings in social sciences, a paper published at Northwestern University says that loss aversion is not a solid concept. While there are some cases where the feeling of loss is considered greater than the feeling of gain, it was found that the level of risk can change how extreme these feelings are. In fact, by managing the risks, the feeling of gains are more extreme than the feelings of loss.

You should only feel worse from losses if you feel like you chose an investment you feel could likely face heavy losses. In general, you should only really worry about the investment you made if you have lost more than 50% of your investment. That is called a stupid investment in my book. You should make investments where you expect gains, but know that you will face some losses.

Be A More Passive Investor

This is why stock investing is considered to be better than stock trading. A publication shows that the least active stock buyers make more than the most active stock market investors. Their most active investors are the ones who changed their portfolio more than twice annually, not look at, change. If looking at your portfolio and seeing numbers in the red rile you up enough to make an impulse in investing, you did not choose a good investment. Plain and simple. If you know the investment will work then those red numbers will mean nothing to you because you know the green numbers will be showing up. Take Warren Buffett’s words of advice: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” You should feel comfortable with your investment if it loses up to 50% of its value.

How You Should Invest While Minimizing Emotions

Your goal should be to make long-term investments, so you should aim to be an investor, not a trader. Just because you are not actively trading does not mean you have to avoid looking at the stock news and prices. In fact, I recommend it. While you will observe losses, by managing the risk, the gains will appear to be better than the losses (and eventually that is likely to be the reality). You will be less likely to sell the investments simply because of a bad quarter or year and better control your emotions.

But how can you tell if it will just be a bad quarter or year? Did you buy a good company? Every time you buy a stock, you buy a part of that company. Find good companies that will be around for at least 10 years. If you do research on these companies and decisively choose which one to buy you are less likely to have chosen a a bad company.

Final Thoughts

While you can do some research into companies to buy, you will never be able to control your financial decisions and control your emotions any better than an adolescent can control their emotions while in their teens. Choosing long-term investments makes you less likely to invest using your emotions. You can face these losses to make more gains to forge your wealth.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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