13 Ways to Take the Emotions Out of Investing

A deep breath, talking with friends, or a snack can help investors reset their brains.
By Christine Giordano

13 Ways to Take the Emotions Out of Investing

A deep breath, talking with friends or a snack can help investors reset their brains.

By Christine Giordano

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Sept. 19, 2016, at 11:22 a.m.

Remove emotions from money decisions.

During times of financial stress, people lose 13 percent of their IQ points and make rash decisions, resulting in poorer decision-making, according to a study by Science magazine. It might be the reason why many people buy high while stocks are popular and prices are taking off, and sell low while they’re panicking during a market downturn, instead of waiting until a stock price recovers a bit. If we could put all of our emotions on hold, and invest with logic, we might all make better investors. But how do we remove emotions from the investing process?

Don’t focus on the minute-to-minute returns.

Despite the enormous wealth-creating power of the market, looking at it too closely can be terrifying, says Daniel Crosby, a behavioral finance expert and executive director of Brinker Capital’s The Center for Outcomes. “A daily look at portfolio values means you see a loss 46.7 percent of the time, whereas a yearly look shows a loss a mere 27.6 percent of the time,” he says. “Limited looking leads to increased feelings of security and improved decision-making.”

Don’t lose your sense of history.

The average intra-year drawdown, or, dip between highs and lows, over the past 35 years has been just over 14 percent, Crosby says. “But the market ended the year higher on 27 of those 35 years,” he says.

Don’t forget how markets work.

Stocks outperform other asset classes by about 5 percent on a volatility-adjusted basis, Crosby says. “Long-term investors have been handsomely rewarded by equity markets, but those rewards come at the price of bravery during periods of short-term uncertainty.”

Don’t love your stocks.

Stocks won’t love you back, and if you fall in love with a security you’ll feel as though you can never sell it, says John Foard III, president of Foard Wealth Management in Charlotte, North Carolina. He sees too many people refuse to sell an investment that is no longer fundamentally sound because they just can’t bring themselves to admit that it was a bad decision. Some say they inherited the investment from their parents and just can’t dishonor their parents by selling it. “Those are all signs of allowing emotion to take over instead of allowing logic and solid fundamentals to drive the decision,” Foard says.

Avoid the herd mentality if you’re a venture capitalist.

I think one of the challenges plaguing the VC community is the use of pattern recognition (or herd mentality) to make investment decisions,” says Minal Hasan, founder and general partner at K2 Global, a venture capital firm in California that invests in rapidly growing technology companies. Pattern recognition stems from a fear of investing in people or spaces that are new or unknown. “You can lose out on some of the most innovative and game-changing technologies because they don’t fit a neat mold,” Hasan says.

Allow for intuition before you invest.

Your gut might tell you when something has mass appeal. “I think it’s OK to use a little bit of emotion in evaluating whether a product will take off with a consumer base, for instance,” Hasan says. “Sometimes there’s just something about a brand elegance of design or ease of use that you just love. Apple (ticker: AAPL) is a great example of this, and Apple’s success is partially dependent on the emotional connection people have with their products.”

Figure out how much you can afford to lose.

Decide when creating your investment plan how much of a loss you think you could endure before it happens, so you don’t take more risk than what you’re able to handle, says Miguel Gomez, a certified financial planner at Lauterbach Financial Advisors in El Paso, Texas. “When the market’s tanking, you’ll probably feel anxious, sad, maybe even depressed,” he says. “Acknowledge that it’s normal [to feel that way].”

Ask questions.

Ask yourself a series of questions before making any investment, Gomez says, including how it will help your goals, what the worst-case scenario is and how your life would change if the investment doubled or collapsed.

Take time to deliberate.

“Faster decisions, or investment decisions based on the feeling of inertia, are typically fraught with anxiety and emotion,” says John B. Dinsmore, an assistant professor in the Raj Soin College of Business at Wright State University. “Take your time to decide, don’t let yourself be pressured or hurried and write down the pros and cons of a particular decision. It will help you be less emotional and make a better considered decision.”

Bounce your investing decisions off of ‘your group.’

“Those who know you best and are unafraid to call you on emotional decisions are valuable to your decision-making process,” says relationship and etiquette expert April Masini.

Think ‘opposite’ when it comes to emotions.

When you feel fear if markets are down, that’s a signal to be happy and ready to buy, says Rick Salmeron, a certified financial planner at Salmeron Financial Network in Dallas. “Conversely, when an investor feels greed when the markets are hot, that’s time to put the brakes on the feeling of euphoria,” he says. “There is the urge to want more, and reach for higher and higher returns, not realizing that you will take greater and greater amounts of principal risk.

Use food to train your brain.

Salmeron recommends keeping a supply of two things nearby: a tasty treat and a disgusting snack. (His are white cheddar popcorn and licorice, respectively.) “When I’m feeling fearful and nervous about the markets? I grab a bag of white cheddar popcorn and celebrate [the opportunity to buy],” Salmeron says. “When I’m feeling euphoric, greedy or ecstatic that the markets have peaked? I pop a licorice in my mouth and it reminds me to ‘keep cool.'”

Follow a formula for asset allocation and proper rebalancing.

Rebalancing is the only way to guarantee that you will consistently buy low and sell high, says Halpern Financial’s portfolio manager, Kirsty Peev. “However, it feels very counterintuitive to buy losers and sell winners, so very few individual investors actually do rebalance,” she says. If your allocation is 50 percent equities and 50 percent bonds, and equities have a great year that throws your balance to 60 percent equities and 40 percent bonds, a disciplined investor would sell off some equities to bring it back to proportion, Peev says.

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