Emotions and Money: A deadly combination
Think logically they say, don’t FOMO in when everyone else is excited - be patient.
This line is uttered by many experienced investors and those interested in personal finance. It's simple and effective advice, yet, it’s routinely ignored.
However, we can’t always blame ourselves. It’s part of our biological programming to be interested in what others in our tribe are too, and our brains are always asking two questions when we encounter situations like this.
How will this make me look?
What are other people doing?
So, when we see what we think is a glorious opportunity to make more money or a friend tells you x is going to go to the moon. Our rational brain is hard to find.
The FOMO (fear of missing out) usually washes over us and can make us do some out of character stuff. Combining this with financial decisions, is as you can imagine, a risky combo.
I’m not going to list all the high profile stories of people hastily pouring their entire life savings into an investment or supposed ‘too hard to pass up, once in a lifetime opportunity’.
A quick google search will provide you with enough shock, horror and downright confusion with some of the tales out there.
Of course, that’s not always the case. Sometimes those lovers of dog themed meme coins do make a quick hefty buck, but it's less often than you might be led to believe.
Getting perspective
When one of these situations arises and everyone is getting excited about the same thing.
I fall back to a quote that I read from Warren Buffet.
"Beware the investment activity that produces applause, the great moves are usually greeted by yawns"
I try to pause, reflect on this quote and say to myself - is what has been presented to me a potential long-term opportunity or another bust?
Of course, this can’t always be determined in a speedy enough window to take advantage of any supposed opportunity. But 99% of the time, the answer is usually avoid.
If you’re a massive risk taker or day trader, then my philosophy is useless to you. But, for those who are looking for a medium level of risk and long term wealth generation, this might be of value.
Taking a pause, letting the first thought pass and waiting for the second, can sometimes be the best thing you do.
It’s very easy to pick on the crypto world here instead of traditional markets due to the swarm of volatility experienced. I’m a big believer in both crypto and blockchain tech. Yet, I find the daily emotional rollercoaster for it’s community to be both fascinating and exhausting.
In my short time watching the crypto space, I’ve read the line “Bitcoin is doomed” just as many times as “Bitcoin is the future, buy it now!”. It feels like the market media is more dramatic that a popular TV soap opera.
But I suppose this is what plays into the activity of emotional investing and feeds our friend FOMO.
People don’t want to miss out on a potentially big thing, and crypto looks like it could very well be that next big thing - the future of finance you could say.
Strategies to keep emotional investing at bay
So, instead of just making captain obvious statements, let’s talk about some things we can all do to reduce the chances of emotional investing.
Explore a regular cost averaging strategy which encourages you to invest the same amount at a particular time.
Set it and forget it with limit orders. Tell an exchange the amount of cash you’ll spend when an asset hits a certain price and like magic, it’ll take care of the rest. You can also do the reverse with selling in the form of sell orders.
Bulk invest and walk away for 6-12 months. This one has become more popular with those who really struggle to show emotional control. They’ll invest a lump sum once or twice a year and only return to review 6-12 months later.
Don’t get involved at all. This is a very valid option if you feel you just can’t handle the FOMO and will find yourself investing into every bit of rubbish that Reddit and Twitter is telling you is going to make you a gazillionaire. You have other ways to grow your wealth.
At the end of the day, no matter what someone tells you, you’ll never know what’s a legit opportunity and what’s trash. Much like, we’ll never know the all time high and all time low of an asset.
Money is a finite resource for many of us. One that we don’t and can’t afford to lose. Remember the importance of taking a data and logical driven approach to any decision.
This is the same for anything in life - do your own research and come to your own conclusion.
I hope this helps and creates value for those of you who struggle with emotional investing.
Let me know some of your strategies in the comments.
Important
I’m not a financial advisor, this is not financial advice and I’m not qualified or licensed to provide anything like this. This content is a bunch of thoughts from a fellow human for educational purposes only — that is all.