Why It Is Necessary to Control Emotions
Such as Greed and Fear While Taking Investment Decisions?
It is likely that you will be taking wrong financial decisions if such decisions are influenced by your emotions. Moreover, performance of your investments will be negatively affected in case these emotions are not controlled. Fear and greed are the two emotions that you have to control so as to take right investment decisions. By taking help of an investment advisor you can ensure that most suitable investment products are selected and such decisions are not biased by your emotions. As such, our aim here will be to go through details of steps you need to take for stopping emotional investing.
Steps for Preventing Emotional Investing
Two important steps you need to take in this regard consist of controlling greed and fear. Let us look at how it can be possible.
Affect of Greed Over Investment Decisions and How to Control It
Greed starts affecting your decision making process when you try to earn highest returns within a short period of time. As for example, negative effect of greed was noticed when dotcom bubble burst (in 2000) and many investors suffered significant losses.
Greed = Likelihood of Greater Losses
Attraction of earning large profits in shortest interval means that investors do not retain profits they earn and in addition to it, do not follow an investment plan which focus on long term growth of investments. In such situation likelihood of losses increases manifold. If you facing a similar situation then best thing to do will be to consult an investment advisor so as to receive right advice according to your financial position. Your investment advisor will also follow basic rules of investing to help you achieve your investment goals. These rules include:
- Stop emotions from influencing investment decisions.
- Develop investment plan that focuses on accomplishment of long term objectives.
- Utilize dollar cost averaging in best possible manner.
Fear and Its Effect Over Financial Decisions
Apart from greed it is also important to control fear which can easily derail your investment plans. As for example, if in a specific time period certain investment products incur major losses then fearful sentiments get a grip over the market. In such situation investors are reluctant to make any investment fearing that they will have to face losses.
Fear = Lower Returns on Investments
In the earlier example of dotcom bubble, while the bubble was expanding the general market sentiment was of greed while it changed to fear as soon as the bubble burst. During that phase some investors moved towards investment which carried less amount of risk (such as money market securities and stable value funds) and as such likelihood of losses was minimal in such investments. But it also meant that they were able to earn significantly lower returns than they would have otherwise earned. By discussing your financial needs with an experienced investment advisor you can avoid these problems and invest in financial products which provide maximum returns with least amount of risk.
To summarize it can be said that it is necessary to control emotions and take rational decisions which are based on proper analysis of market trends.