How to avoid emotion-based investing

Experts can make predictions about the trend of the market. They study technical and fundamental analysis, charts, make deductions, etc but the financial market has certain volatility in its stability due to the influence of many factors such as government policies, international transactions, speculation and expectation, and supply and demand.

Humans are emotional and reactionary beings and when it comes to humans and money, fear and greed can be powerful motives. Investing based on emotion (greed or fear) is the main reason why so many people are buying at market tops and selling at market bottoms.

This article focuses on emotion-based investing, its causes, and how to avoid it.

Emotion-based investing just as it reads means investing based on emotions as opposed to market data and other fundamental/technical market analysis. It is basically making an investment decision based on the instincts and reactions of others and out of fear and greed. You may believe you are making a rational well thought decision but unconscious influences such as cognitive biases may be working against you.

Causes of Emotion-based Investing

1. The human nature of including an emotional aspect in everything.
   Humans are compelled to have an emotional component to every action they take; It’s the nature of humans for their decisions to be influenced by combinations of psychological factors. This can also happen when it comes to financial investments. Our emotions can dictate when to go in or pull out of an investment even when it is a false deduction.
2. Natural Up and Down movement of the financial market trend.
   Investors naturally react to these swings to inform their investment decisions. Typically, four different stages trigger emotional investment decisions.
   - Optimistic stage: Where the market values rise relentlessly, and investors feel enthusiastic and highly excited as their balances grow.
   - Anxiety stage: Where investors become filled with mixed feelings of fear, despair, and denial.
   - Panic stage: At this point, investors want to pull out and prevent any further loss, and even those who maintain their investments are not confident of a recovery.
   - Dismay and hope: It is the last stage of the emotional investment cycle and is almost similar to the first stage. Here, the market begins a bull market after an extreme low. Investors who pulled out are in dismay, while those who retained their investments start to feel relief and hope the upward trend continues.
3. Social Media hype/market hype
   Take cryptocurrency as an example, one of the factors that ‘pump’ and ‘dump’ a coin is the frenzy/hype around the particular coin or NFTs. When millions of people are bullish about a coin or crypto project, it could influence others emotionally to invest in that project. Also spreading a FUD about a project can cause a downturn and panic in the market.

How to avoid emotion-based investing

1. Don’t be afraid to lose
   You don’t have to panic sell just because your investment is going in a downward spiral. The moment you begin to invest as if you’re trying not to lose, you become an emotional investor (and an overly-safe one at that — which isn’t a good thing). Taking losses within your portfolio is okay. It’s okay for an investment to strike out completely. This does happen. And this will happen to you — and even the best investors.
2. Avoid frequent checkups on your portfolio
   No one loves to see their money go down the drain. During a downward market movement, or a bear season. Avoid checking your portfolio, so you don’t panic and make decisions based on your emotion.
3. Consider the big picture
   Have a long-term investment, and keep your focus on the long-term vision and not the market fluctuations happening in the now.
4. Seek the advice of a financial advisor
   They are professionals in the field and would give you great advice on what to do at every point in time. Seek their advice.

Strategies to avoid emotional investing

1. Diversify your portfolio: Don’t put all your eggs in one basket. Various investment instruments seldom follow the same trend at the same time, so diversifying your assets will give you some safety. Furthermore, because the financial market is so large, one may invest in a variety of businesses to distribute risk. Losses in one industry are compensated by increases in other industries, reducing the likelihood of emotional reactions. Spread your risk across several classes of investments. You’ll be glad you did. Also, in the TRiBL app, there are several investors’ clubs available for you to spread your investments across. Download the app now and start your non-emotion-based investment journey with us.
2. Dollar Cost Averaging
   This is a very popular investment. Rather than investing a single dollar amount all at once, the complete money is divided into equal portions and invested at specified intervals. Regardless of market conditions, investments will be made automatically. The shares acquired at various times, in both bullish and negative markets, assist to reduce the overall effects of market volatility.

A whole lot of research, getting access to the right information, and having the right money mindset/trading psychology are needed to help sail through the various seasons in the financial market. Always remember that losses are inevitable. Don't allow fear or greed to fuel your investment decisions, and if you know you can’t manage your finances, employ a portfolio manager to help with that. Investment is for the Long term, so, think long term.