The Emotional Curve of Investing
Let’s face it: Human beings are not innately wired to be prudent investors. Human emotions are powerful forces that can lead you to buy high and sell low, which is exactly the opposite of what you should do. And if you let emotions guide your investment decisions over a long period of time – as research on behavioral finance indicates many investors do – you can do serious damage to your portfolio and, more importantly, to your financial dreams.
Allow us to illustrate the emotional curve of investing and how letting yourself ride this roller coaster typically leads to a disappointing finish. Let’s look at what happens when you get a “hot tip” on a stock.
If you’re like most investors, you don’t buy the stock right away. You’ve probably had the unpleasant experience of losing money on an investment in the past, so you’re disinclined to act on any tip without following the recommended stock for a while to see how it performs.
Let’s assume the stock starts trending upward. How do you feel? You’re starting to think that buying the stock would be a good move. Now, let’s say the stock continues its rise. You begin to consider that this might be the one investment that helps you make a lot of money. Right about now, you start feeling a different emotion: greed. You decide to buy the stock that day.
You know what happens next. Soon after you buy it, the stock starts to go down, and you feel a new combination of emotions: fear and regret. You’re afraid you made a terrible mistake. You promise yourself that if the stock just goes back up to where you bought it, you will never buy like this again. You don’t want to tell your spouse or significant other about what you did. And you don’t care about making money anymore.
Let’s say the stock continues its downward slide. Enter yet another new emotion: panic. You sell the stock. And what happens next? New information comes out that causes the stock to race to an all-time high.
This is no way to invest. At Grand Wealth Management, we take a far more rational and analytical approach to managing our clients’ long-term wealth. We invest our clients’ assets according to clear thinking and proven investment principles to help them achieve their financial goals.