Investment is often regarded as a strategic, methodological and an entirely rational process. Yet, this is not always the case. In practice, the simple goal of maximizing gains and minimizing losses is very challenging - and often not very logical - for many investors.
Emotion is one of the important factors to be considered when you are into investing. Your decision must be based on logic and on facts, not emotions. This is one of the difficult things to overcome. Sometimes, we make decisions based on our emotions and then justify those decisions with logical reasoning.
Managing emotions is one of the key things to become a successful investor. A few weeks ago, the Philippine Stock market was at its drop-- from being bullish, it met almost the bearish trend. During that time, all network groups and pages in Facebook have different posts and reactions. Some were happy and started buying and buying more. Others were fearful and sold their shares at the slightest indication of a price drop. Who wins in the end? The wise investor who studies the market situation, manages his emotions and acts according to reason.
A field of study known as behavioral finance is dedicated to studying the emotions behind economic decision-making. Behavioral finance borrows ideas from economics, psychology, game theory and even evolution, to model decisions by individuals. Some of the “irrational” behaviors they observed include: framing, which means the way a decision is presented affects an investor’s action, and loss aversion, which means investors strongly prefer to avoid a loss rather than to miss an equivalent gain.
Another area of emotion-laden decision making occurs throughout the boom and bust cycle of stock markets. Here, the interplay between fear and greed is the chief driver. And unfortunately, these emotions are counter-productive for most investors. In other words, emotions lead to poor investment performance.
While every investor tries to invest with their head and not their heart, he or she will also recognize that markets themselves are a clear reflection of public opinion and trust. Though markets are highly reactive to investors’ emotions, a step back reveals that movements driven by investor sentiments are a lot less unpredictable than one might expect.
Indeed, just as markets move in cycles, investor sentiment also follows a cycle that repeats itself every seven years or so. Emotions evolve as we progress along the cycle and correspondingly affect our decisions. Understanding this cycle of emotions is not just instructive – it can help us generate higher returns by investing at times of fear and being less sanguine when confidence is overflowing. Hence, the trick is to react in ways that will help us make the most of the ride on this emotional roller coaster.
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| How would you react? |
Emotions to be managed by investor to achieve his/ her financial goals:
- Panic - an emotion that mostly happens when the market or investment drops a certain limit which the investor cannot resist, the fear of losing mostly in the short -term.
- Excitement - a feeling of great enthusiasm and eagerness. Opposite of panic, this emotion mostly arrives when the investor gains a small profit and feels like an expert.
- Fear – a negative emotion that blocks investors to take risks despite potential gains. Unless we overcome, fear we will never be a successful individual.
- Hope - is a positive emotion which promotes the belief that his/her investments will gain in the right time.
- Thrill - this emotion usually happens to the traders in the stock market, their personality is usually being thrill hoppers.
- Greed - an attitude of investor which usually happens when the market is up and it is the right time to sell but will postpone it believing he /she can still earn more. Example : “I won't sell now, it might still get higher.”
- Envy- a feeling of unsatisfaction with his/her profits when compared it with the bigger profits of others.
As investors, we need to understand that the market is tricky and requires a study to learn on top of studying to control our emotions. It is easy to say "Buy Low and Sell High" but the truth is, we are emotionally driven and get lost ourselves when things don’t happen the way we not plan them to be.
"The world of investing can be cold and hard. But if you do thorough research and keep your head on straight, your chances of long-term success are good".
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P.S. 1. Bernard B. Anduyon is an OFW based in Qatar. He is a speaker and trainor for OFIE-M (Overseas Filipino Investors and Entrepreneur – Movement), a small group of Filipinos that advocates and teaches fellow OFWs to be investors and entrepreneurs. He is also a long-time member of Bo Sanchez' Truly Rich Club http://bernard.trulyrichclub.com.
P.S. 2. If you, your family or friends are based in Qatar, then I’m inviting you to attend our financial literacy talk series every 1st and 3rd Mondays of every month at Al Thumama, Doha. I give talks on diverse topics such as abundance mindset, financial planning, investing and entrepreneurship for Filipinos. I am also a trainor for PINOYWISE-ATIKHA, promoting awareness on issues affecting OFWs and their families as well as financial literacy.
If you want a financial coaching, you can send email to b_anduyon@yahoo.com
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