Beware of Emotional Investing

Patrick McGrath, Ph.D.
February 28, 2013



Some things just aren’t easy to do.

Rock climbing, skydiving, basic arithmetic (for some of us). Not everything comes easy. But that doesn’t mean that they’re things that aren’t worth doing, it just means that they may require more effort, energy and even anxiety than we thought they would.

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This idea holds true for making important financial investments. The key? You have to decide if you’re more interested in short-term success or long-term gains. You have to determine what kind of risk you want to take, and you have to avoid making investments based on your emotions.

One of the biggest issues I see that people have trouble understanding is that, like with many things in life, the long-term gains are more important than the short-term benefits. For example, many people got financially scared years ago, so they pulled their money out of the market in search of safer ways to invest. They were down, and they were fearful of the future. I can’t say that I blame them for their fear, but it seems that if many of them had actually stayed in their investments, they would have done well over the last few years.

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We often see this in psychology when working with patients. Most anxious people will do whatever feels best to them right now – even if in the long term it is not the best thing. For example, the person with Obsessive Compulsive Disorder (OCD) who washes his hands until they are raw knows that washing his hands will hurt him mentally (and even physically) in the long run, but that pain from washing is overridden by the fear that they may be contaminated by something in the short term. So that person goes for the relief of the fear at the expense of the damage to his hands.

The point? If you want to have successful investments, then you have to decide if you are only looking for short-term gains or if you are going to weather various economic storms in order to achieve long-term gains because, as you work toward long term gains, there are going to be fluctuations in the market. Pulling out when there is a dip in your portfolio may feel like it is best to cut your losses and run, while waiting out the dip almost always pays off for people in the end.

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If something is bad and not working out for your style of investing, then by all means — make some changes. But, beware of emotional investing: Even when the state of the economy seems dismal, things eventually seem to bounce back and even improve. Even housing will gradually get back to where it was five to ten years ago — it will just take time.

Be sure to consult with a financial planner (or even a few of them) to get many opinions. This can help to take the stress out of investing and help you feel better about what you are doing with your money in the market. Best of luck, and many good returns to you.

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