Are you an emotional investor? Emotional investing occurs when investors make drastic decisions about their money and assets based on a feeling of how the market is performing.
This can also be described as FOMO, or fear of missing out:
( FOMO) is a social anxiety stemming from the belief that others might be having fun while the person experiencing the anxiety is not present. It is characterized by a desire to stay continually connected with what others are doing.
When I was a financial advisor many years ago, we all were looking for the next big investment. Some of us were big on tech stocks. Others were focused on bonds. A few preferred penny stocks. We all had our specialties, and we ALL liked IPO’s. We also remembered something very important about investing:
Invest With Logic, Not Emotion
My fellow stockbrokers and I saw all the hot stocks during the big tech boom of the early 2000’s. Every day, we saw stocks going up to new highs. Excitement among our clients was at a fever pitch. Everyone was an expert and could tell you what the next hot stock would be.
The euphoria we see today reminds me of what we saw before the tech bubble burst in the early 2000’s and the real estate market crash in 2006. Unfortunately, both markets crashed literally overnight:
There was little chance of getting out once the bottom fell. In both instances, they crashed with little warning or advanced notice. Could that happen today? Time will tell.
The following companies were once worth hundreds of millions of dollars, but all went bankrupt after the tech crash:
A company could be hot today and gone the next. It’s critical people resist getting caught up in the excitement of the moment.
How To Avoid Emotional Investing
There is a good chance the stock market and cryptocurrencies will continue to hit new record highs. But there’s also the chance they can drop just as fast as its risen. Instead of letting your emotions dictate your investing habits, keep the following in mind:
- There will be other great investment opportunities. If you believe the price is too high, don’t fret: There are other investments out there to choose from. The key is to do your homework and look for other assets that are doing well and fit your investment goals and strategies. In other words, invest in other things besides the hot stocks and the top cryptocurrency.
- Be patient. No investment ever goes straight up forever. Every investment has a pullback: early investors tend to lock in their profits and sell at some point.
- Understand why you’re investing. Why are you buying this investment? Are you doing it because everyone else is, or because you believe in the product? Be very careful following the crowd. Just because they do it doesn’t mean it’s right for you. Understand the product you want to invest in before doing anything.
- What type of investor are you? Some people invest for capital gains, which means to invest for profits. Others invest for cash flow, which means to buy assets and receive monthly income or revenue. The type of investor you are will play a key role in your investment decisions. Read more about these types of investors HERE.
- Have an exit strategy. Whatever you choose to invest in, have an exit strategy. Don’t just have screenshots to show how much money you had before the stock or cryptocurrency dropped in value. Set up a stop-loss to lock in profits. Consider selling a portion of your investment if it reaches new highs. What will you do with the profits once you sell? Gold, silver, real estate, fine art and other investments might be worth looking into.
- Do something. In 2022, this will be more important then ever. There is something going on in the economy that we MUST be aware of. Thanks to inflation, your money could actually lose purchasing power if it is sitting in a bank account.
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As the markets reach new highs, its easy to get caught up in the excitement. Resist the urge and stay calm. Remember why you’re investing and make your decisions with logic and emotion. Your bank account (and nerves) will thank you.
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