Offshore Planning
The importance of not getting over emotional
The two emotions that strongly characterise the financial markets are fear and greed. Several books about the emotion of investing have been written. Below we take a look at some of the common emotional errors of so many investors so that you will be better able to recognise whether your decisions are based on reason rather than passion. Even the most sophisticated investors have occasionally even found themselves guilty of falling into these traps.
Comfort Level
So often investors get caught up in greed. After all, we all have a desire to acquire as much wealth as possible in a short period of time. For this reason, it is difficult to invest under a strict plan with which we are comfortable. But gurus like Warren Buffett have shown us just how important and beneficial it is to stick to a plan. Mr. Buffett was once heavily criticized for refusing to invest in high-flying tech stocks. But once the tech bubble burst, his critics were silenced. Mr. Buffett again looks like a genius because he stuck with what he was comfortable: his long-term plan.
Comfort investing goes back to the roots of what investing means. At the most fundamental level, it is employing a strategy that links your money to a particular corporation that has provided a strong reason for you to purchase their stock. Investing is not "playing the market." It is about maximizing the return on opportunities that are suitable to your risk tolerance and your skill level.
When investors lose their comfort level because of losses or volatility , they become consumed with terrible emotions such as fear, greed and superstition, which always provoke mistakes. Volatility in the stock market can make even the most savvy investor uncomfortable. Unless you know how to interpret and take advantage of day-to-day price movements, you may have to refrain from being consumed by them. Volatility is a reality of the stock market, so before you invest, you must know how you are going to deal with volatility and then act accordingly. If you can't stop worrying about price fluctuations, perhaps a lower risk investment like treasuries would be better for you.
The "Break Even" Jinx
It is human nature to hate losing. Whether it be in school, sports, or our career, we all want to succeed. The same is true for investing: we don't like to experience losses. The problem with this tendency is that it distorts judgment. Time and time again, investors will wait on a losing investment because they are hoping it will eventually break even with the purchase price. We have the misconception that as long as you haven't sold the stock there isn't any loss. This loss aversion causes us to hold onto a losing investment, which, in most cases, only results in even more losses.
Lack of Self Control
Lack of self control is another way in which some investors carry their bad habits from life into their portfolio. Investors know the importance of being rational about their portfolio, but putting rationality into practice is difficult. If the markets fell 4% today, most of us wouldn't panic too much. The next day is another story when all the papers have big bold headlines reading "meltdown" or "crash." Self control then starts to diminish. In the end, most people, rather than sticking to their own plan, will follow the assessments of market gurus and begin relying on their herd instinct. Be patient and control your emotions.
Keep in mind this isn't as easy as it sounds. In fact there is a fine line between controlling your emotions and being just plain stubborn. Remember also to re-evaluate your plan and let yourself be flexible, but make sure you are thinking clearly when you make any decisions to change your plan of action.
Conclusion
You are the final decision maker for your portfolio. Getting to know your emotions, awareness, and control of your inner being is extremely important to successful investing. Unless you understand yourself, no investment strategy will be able to help you.
