Emotions and Investing.
Everything you've ever wanted is on the other side of fear. - George Addair
People have different risk tolerances, exposure, and mental capacity to handle money. The meaning behind money is different for everyone, and that is why investing is hard for any individual. An investment journey is more than rocketship or moneyface emojis - It is the journey one takes to learn more about themselves and how they react to the market. There could be deeply rooted behaviors/beliefs when it comes to investing that may push/pull people into different directions when making decisions. It’s important to have a plan and to continue to refine their process to handle more money in their account over time.
Volatility
Simply put, you’re not coming into the investment game thinking you’re going to lose because you are investing to grow your money. If you hate volatility then you’re definitely in for a ride. You must learn to be ok with volatility because it will not go away now or in the future. As your account increases in value – so does the volatility, which can make you sick to your stomach or elated. It’s not a bad thing if you’re starting out feeling both sides of the emotional spectrum. Overtime you should start to feel detached and unmoved. This is comparable to any task you do thousands of times per year. To a surgeon – it’s just another surgery. To a mechanic – it’s just another car. To a NASCAR driver – it’s just another race. Overtime, the goal of obtaining assets and growing your money will be the same – it’s just another investment.
Imagine your account showing an increase/decrease like this. Ask yourself how you feel when you see these pictures? If you feel any type of emotion, such as greed/fear – try to understand why you feel that way. It doesn’t matter if its three, four, five, six, or seven figures in your account. What matters more is not getting sidetracked by the amount of monetary swings that happens day by day. It’s easy to stay in the game when the market is trending upwards – only because your account is most likely in the green. The opposite may not be true when you’re in a downtrending market or first starting out. As you get deeper into investing, reflecting will become important for self growth. To help you stay level headed on your journey, here are some factors that may make you emotional.
Unrealized Gains
Unrealized gains/losses can make you feel different levels of fear or greed. Unrealized losses are harder to deal with than unrealized gains. This is because losing money is hard for people to cope with – especially if you’re new to the market. As people get more into investing, they sometimes “marry” the stock – meaning they never sell despite the downturn of that stock. When the stock has reversed from gains to losses, people hope and wait for it to reverse. This ‘hope’ is your fear that has finally kicked in because you didn’t take the necessary steps to secure profit on that particular stock. I’m not saying that you’re trading, but sometimes when investing in new stocks, you may see the stock take off and then come back to earth. Unrealized gains are pretty much the opposite, but the problem is that people don’t sell off to retain their capital to get into another stock. The importance of taking your capital out is to keep yourself level headed. Majority of people think of the “homerun” play, which prevents them from taking any profit beforehand. Please understand that profits are not profits until realized, and that unrealized losses should be cut.
Perspective & Time frames
The person who is looking to profit today or tomorrow is bound to end up losing their capital. When you’re investing, you should actually be investing – not looking for quick profits. New investors are not used to holding money in the market because they are very risk averse. This can definitely work against you if you’re quick to take profits. The greatest arbitrage is having the longest timeframe, which can be seen on this chart. When you’re looking at the longest time frames, you’ll be able to have a better perspective of what the future could/can bring you. Having the mental fortitude to have your capital in the market is a fee that you pay everyday. It’s something that you have to be cognizant of. Majority of people do not have the risk tolerance or balls to be in the market all the time. If you’ve seen Real Estate – something that is held for 30 years. That asset class that has definitely gone up over time no matter what. If you’re looking at this chart of the S&P 500. Anyone who has held in the past is 100 percent in profit. Keep that in mind when you’re thinking of the future. Simply put, when you’re in doubt – zoom out.
Capital At Risk.
Money is money regardless how you cut it. The importance of risk management is definitely a must if you’re going to survive the investment journey. Going all in is risky because you subject yourself to price swings you may not be ready for. If you find yourself not able to sleep at night – that may be a sign that you have too much money/risk in an investment. In time you will have the mental fortitude to put a large amount of capital towards an investment, but that takes time. When you have a hefty account, putting a small portion of that at risk to gain a bigger pie is how it’s really done. As your account grows, you can grow your account relatively easily without breaking the bank to propel yourself forward. Rule of thumb is to only invest the amount of capital you’re willing to lose. Investing is a marathon to retiring wealthy. Sprinting your way through your investment journey can have your money sprinting away from you just as fast. On some investments you will lose. Not every investment you pick will be a winner so it’s important that you’re not putting the house up on any type of investment – unless you’re very skilled in doing so.
Only Deviate When The Data Changes.
An investing thesis is always needed to make sure you do not deviate from your plan. Anything that is worth having does not come easy. It’s very easy to become emotionally attached to the gains or the money that you may lose, but it’s important to stay focused on your plan. If you invest in random stocks, you get random results. At the end of the day you need to remind yourself why you invested in the stocks you picked. Personally, I would learn how to read a stock chart, but that is next level stuff that I invite others to learn when they can. It’s not needed, but it can help you get an edge on your investment. Understand the macro picture behind the stocks you’re picking so you can logically understand if you need to change course. When markets are red, you will not be able to think. Have everything ready so you do not have to think – you’ve already done the prep work. Trust yourself.
When is it enough?
So let’s say you have a winner – what’s next? Nothing wrong with taking profits if you want to dip your head into other sectors or industries. Have a plan to realize some profits, but if you don’t need the profits always make sure you do not let your winners become losers. Investing is a hard game because you don’t know what will happen. However, if you feel that you want to consolidate your portfolio or make a purchase on something big - just know what it took to get there. However, the money you gained from investing allows you to buy the things you want without having to save up for the whole amount. Understand that investing is a fluid concept, but it only takes one time to get it right. Once you get right you’ll be able to duplicate the same process.
Good luck to all. Believe in yourself.
Retire By Investing is on a mission to help others increase their free time through financial education. This substack does not provide financial advice of any kind. We do not sell or manage financial investments or vehicles. We are not licensed individuals and are not liable for any financial decisions you make. Please do your own due diligence and consult/seek your financial advisor regarding any decisions. Thank you. Have a great day!
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