Investor Psychology

4 Tips to Help You Keep Your Emotions Out of Investments

Making good financial decisions requires more than just good information, you need a clear head, some discipline and a little distance.

Money is always an emotional subject, but often when our emotions get involved with our investments we will make wrong decisions. And that can be a costly mistake. Keeping emotions and investing separate seems almost impossible for many investors. When reacting too quickly and letting emotions cloud judgment, even the most professional and experienced investors do not make the best decisions. However, keeping emotions away from investment decisions can give you a better chance for success.

Here are four tips on how to keep emotions and investing separate:

1. Set financial goals. Setting financial goals is the first step to investing, and financial goals can keep emotions out of the picture if done correctly. Having a plan will help you keep an eye on the big picture. For example, if you are saving for retirement in 20 years, you know that you have more time to make up for any losses than if you plan to retire in 10 years. These goals can also keep you focused on what you need to do today to get there.

2. Fight the urge to check performance too often. You might be someone who has the urge to check up on your investments every day, possibly for hours. In doing so, you will see more of the market gyrations than if you check monthly or quarterly. Checking so constantly will not benefit your portfolio in any way, but it may just cause more anxiety. This is even more important if you own individual stocks or mutual funds in any kind of personal account or retirement account. Checking these holdings too often can cause you to panic, and you might make a snap judgment trade. Instead, keep your checks to monthly or quarterly, and concentrate on sticking to your overall plan.

3. Know the objectives and risks in what you buy. Knowing what you are buying is crucial to help you avoid emotional setbacks in investing. Always do your own research before purchasing anything, even if you have outside assistance. Understand what the investment is, how it will help you achieve your goal, what the risks are, and when and how to exit. Without your own research, you will not take full responsibility for your trades, introducing negative emotions.

4. Assign a professional buffer zone. You can create some distance between yourself and your investments by putting a financial professional in the middle of the two. Entrusting a neutral third party who can help you examine your situation dispassionately and encourage you to stay on track, you can hold yourself more accountable for the things that you can actually control.

Did you know? From the small purchase decisions to the large financial plans, it often helps to write things down. Then, you can examine how you come to decisions — which should lead you to make better ones.

About the Author

Justin J. Kumar, Investment Adviser Representative

Senior Portfolio Manager, Arlington Capital Management

Justin J. Kumar embraces a proactive, systematic investment management approach with a customized, proprietary system to help guide his clients toward their financial goals.

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