Have you ever found yourself making investment decisions based on a gut feeling or reacting impulsively to market news? If so, you may have fallen into the trap of emotional investing – which can get in the way of your financial goals. 

Read on to learn what emotional investing is, the risks it poses, and practical tips to help you avoid it.

What is emotional investing?

‘Emotional investing’ means making financial decisions based on feelings or emotions, rather than on objective research and analysis. This can include buying or selling investments based on fear, or even a personal attachment to a particular company. And unfortunately, as investors, letting emotions take over can often lead to poor results.

The risks of emotional investing

When you allow emotions to dictate your investment decisions, you risk making hasty choices that may not align with your long-term financial goals. Here are some common mistakes emotional investors make:

• Buying high and selling low – Reacting to market swings can cause you to buy into investments when they’re overpriced and sell when their value is low. Remember: timing the market is nearly impossible, no matter how well-informed and confident you feel. 
• Missing out on opportunities – Emotional investing can lead to a fear of missing out (FOMO), causing you to chase after the ‘next big thing’ without proper research or analysis.
• Ignoring fundamentals – Relying on emotions may cause you to disregard essential factors such as a company’s financial health or market conditions.

One recent example of ‘emotional investing’ was the 2020 ‘Big KiwiSaver Switch’, when thousands of KiwiSaver members decided to suddenly switch to lower-risk funds, in a misguided attempt to protect their savings from the Covid-19 market downturn. However, many didn’t consider that their risk profile and long-term goals hadn’t actually changed. And by switching when the markets were low, they turned their on-paper losses into actual losses and possibly not making the most of the subsequent market recovery. 

So, how can you avoid emotional investing?

To prevent emotions from clouding your judgement, consider these practical tips:

• Set a plan – Establish a clear investment strategy, outlining your financial goals, risk tolerance, and investment timeline. Then stick to your plan, making adjustments only when necessary, based on objective data.
• Spread your investments – Diversify your portfolio across various assets to help reduce risk and prevent emotional attachments to individual investments.
• Keep your eyes on the prize – Remember that market fluctuations are normal, and a long-term investment approach can help you weather short-term volatility.
• Seek professional advice – Consulting a financial adviser can provide guidance and help you make well-informed decisions. This brings us to the next point…

We’re in your corner

Need assistance navigating the emotional landscape of investing, or would like to review your investment strategy? Please don’t hesitate to get in touch with us. We’re here to help you make the most of your financial journey.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.