Emotions and Investments

Emotions are like money in many respects.

They make a wonderful servant - and a very poor master.

Emotions are frequently the root cause of financial losses for investors. When the markets experience a downturn, emotions can compel investors to sell their stocks, rather than wait for a recovery. This can occur because the short-term decrease in valuations causes discomfort or fear, leading to hasty decision-making.

Furthermore, emotions can lead investors to prioritise quick and high profits over proper risk management. This can result in disregarding warning signs or failing to take action to mitigate potential risks. As a result, investors may find themselves facing significant losses, or needing to wait a long time to recover when they needed their returns back sooner.

It is essential for investors to recognise the influence of emotions on their decision-making and to develop strategies to manage them effectively. By maintaining a rational and objective approach to investment decisions, investors can avoid making impulsive decisions based on emotional responses, and instead, make informed choices that are more likely to result in financial success.

Tying investments to your own goals is one of the best ways to mitigate the risk of making hasty decisions (or no decision at all which can also be costly).

Your goals and dreams will often have timeframes to reach, and you can pick suitable investments for each one. A goal of saving for a deposit for a house within a year is going to suggest a very different, lower-risk approach than saving to retire in 30 years times. It probably wouldn't make sense to go for stocks for a one-year goal, just as it wouldn't make much sense to go for a low-interest savings account to fund your retirement for example.

How you detach your emotions from your investment decisions will play a major role in your success.