Even before we buy our very first share of stock, we find ourselves riding the rails of an emotional roller coaster. Hope, anxiety, relief, denial, optimism, despair, euphoria, panic — these are the feelings that every investor experiences in a lifetime.
Emotions can generally be grouped into one of two categories: fear-based emotions and greed-based emotions. Fear-based emotions are most prevalent when markets trend downward. Complacency turns to anxiety, shifts toward denial, moves into despair and culminates in panic. Typically, it is near this point when investors take huge losses… when hope no longer springs eternal and despondency sets in.
As markets begin an inevitable rebound, greed-based emotions take hold of an investor’s psyche. Despondency turns to hope, swings to relief, moves toward optimism and cruises straight for euphoria. The hopeless memories have faded and the false comfort of complacency establishes a home. Alas, investors feel they can invest safely again, though it ends up being an exceptionally ill-timed decision.
What can one do about the emotional roller coaster? How can you avoid becoming your own worst enemy?
The first step is to recognize where your investment decisions begin. If you are like most investors, you envision, even fantasize about, how much money you are going to make. Any distant thought of selling your position hinges on how far “in the black” you are before you would ever think about ringing the cash register.
But what if your investment doesn’t make it far enough into the black? What if it falls into the red? Heck… what if it never makes it out of the red? Do you have a plan to protect yourself in the event things don’t pan out? How bad must it get before you finally do something?
The problem most investors have is that they are extremely biased when considering both positive and negative outcomes. After all, if there were an equal likelihood that you could lose money on an investment, you might not purchase it at all, right? Few consider a 50/50 gamble to be advantageous to an investment portfolio.
A giant step in the right direction is realizing that successful investing has little to do with the odds of being right or wrong. Rather, it’s how bad you allow those wrongs to be.
Consider the following example: