One of the problems that many Canadians have with investing is that they become too emotional. A survey by the Bank of Montreal a few years ago found that two-thirds of Canadians have a hard time keeping their emotions in check when they invest.
While it's impossible to get rid of emotion altogether when any type of money decision is involved, it is important to do what you can not to let your emotions overrule you when you make investing decisions. It's especially important not to let fear rule you when you make your investment decisions.
Fear and Investing
Fear is one of the strongest emotions that we feel. As a result, it can prompt action quickly if you don't get it under control. One of the most dangerous effects of letting emotion rule your investment decisions is panic selling. When you let fear overcome your good sense, you might end up selling when an investment is low. While there are definitely legitimate times to sell a losing investment, the fact that you are giving in to panic is not one of them.
Instead, look at your investment, and evaluate why you want to sell. Is it because something fundamental has changed about it? Or is it because the market is tanking and everyone around you is selling, and you're afraid? Take a step back and look at your motives. Don't sell just because you're afraid. You need to come up with a good reason to sell. If you can't explain why you are selling, other than that you're scared about losing more money because things are tough, then maybe you need to reconsider.
Don't Forget About Exuberance
Another problem, though, is exuberance. When you are too excited about something, it can lead you to ignore the true merits of an investment and sink more money into it. Another problem with investing when you are caught up in the excitement is that it can lead you to buy at a high price. If you are excitedly buying because it's a “sure thing” that everyone else is buying, there is a good chance that you aren't getting the best value for your investment buck.
Before investing, consider the merits of the investment. Look at whether or not it is a value investment, and consider the fundamentals of the investment. You also want to consider the long-term staying power. Getting excitedly involved in today's “hot” investment can lead to problems later.
Make an Investing Plan
One of your best options is to make an investment plan. Think about what you want your investment portfolio to accomplish, and consider what is likely to best help you reach your goals. Consider asset allocation, as well as individual investments. Take the time to get to know what makes your investments “tick”. That way, you're more likely to understand what you're doing.
A plan can also help you stick to your guns when emotion threatens to overwhelm you. While you might need to make some tweaks to your plans, there's no reason to overthrow them completely in most cases. Your plan can help you stay on track, and help you overcome emotion.
If your investing is too emotional, take a step back, consider your situation and goals, and then try to evaluate things without the same level of emotion. Keep your emotions in check, and you'll be a better investor.