One of the biggest challenges for all investors is ignoring emotions. Certainly, outside of investing emotions help to make decisions. Often a person’s gut-feeling will help them to ascertain whether a course of action is right or wrong for them. However, when it comes to investing, your emotions can leave you feeling either fearful or greedy.
For example, in the current climate many investors across the world are feeling uncertain and anxious about the future. The impact on the global economy of events such as Donald Trump’s election victory and the UK leaving the EU could be negative. However, to avoid investing because of what could happen in future from known risks would have meant sitting on the sidelines for most of the last century. In other words, there are always risks present that could cause uncertainty, disappointment and losses. However, as long as a wide margin of safety is available, investors can still benefit in the long run.
For example, during the most recent global financial crisis, many investors failed to buy high quality stocks when they traded at discount prices in 2008/09. Doing so could have led to significant gains on stock markets across the globe, but would have meant fear, uncertainty and paper losses in the short run. Therefore, while buying during downturns and during periods of uncertainty may feel wrong, it can prove to be the best time to buy. In this sense, ignoring your emotions and focusing on facts and figures should boost your portfolio performance.
Similarly, during periods of economic prosperity it can be easy to assume that the world economy will grow indefinitely without any challenges. However, this is never going to be the reality and asset prices will always fluctuate between ups and downs over a period of time. Therefore, it is important to check whether a company’s share price indicates that it is fully valued. Clearly, it is easy to form an emotional attachment to a stock which has generated profits for you in the past. However, it is crucial to focus on facts and figures rather than to either become greedy and expect more profit, or consider an asset as anything more than a means of generating profit.
For most people, ignoring emotion is very challenging. Many inexperienced investors end up buying during booms and selling during busts because it feels right to do so. However, what feels right and what is a sound investment decision are two very different things. Successful investors such as Warren Buffett know that the time to be greedy is when others are fearful, and the time to be fearful is when others are greedy. By adopting such a mentality, your portfolio performance may become relatively volatile. However, it should also become increasingly profitable over the medium to long term.
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