3 Ways to Keep Emotions in Check When Investing

Written by Judy McKinnon

Have you ever fallen in love with a stock for all the wrong reasons? Maybe it was a hot, new trend you hadn't fully researched. Or you got caught up in the buzz of what your friends or family were doing. Maybe it worked out; maybe it didn't. We may not like to admit it, but emotions can often get the better of us when making (or not making) portfolio decisions.

"Emotions can hijack your investment decisions," RBC Behavioural Economics expert Michael Sherman said in an interview.

"While we all tend to be emotional about money, we're far better off when we approach long-term investment strategy from a cool and rational perspective," he said. "Letting emotions influence our investing decisions can often lead us astray and can result in decisions we'll regret in the long term," he added.

Getting Caught Up in the Excitement

With stock markets continuing one of their longest bull runs in history, despite some recent whipsaw movements, it's hard to avoid getting caught up in the excitement. There's no shortage of tales of overnight success as certain hot investments skyrocket, which for some makes it seem like a great idea to jump on the bandwagon. Same goes for getting caught in panic mode and maybe selling prematurely when markets turn. Investing can be a roller coaster of emotions.

Source: RBC Global Asset Management

Keeping Emotions in Check

So, just how do we work to keep emotions out of our investing decisions? Here are three considerations.

1. Stick to the plan. Whatever that plan is, you put it in place for a reason. It should be your guiding light to help you reach your long- or short-term goals. This can be particularly useful when markets take a turn for the worse. As Sherman points out, fluctuations are an integral part of the mechanics of markets — and assuming your investment strategy is right for you, you should be able to rest easier as markets run their course during turbulent times.
2. Look at how often you're looking. Portfolio monitoring is a key part of investing in order to keep track of what's happening with our investments. And staying engaged is definitely important. Find the right monitoring schedule for you – maybe it's daily, maybe weekly, monthly, etc. Sherman says sometimes, though, the behavioural economics adage coined by psychologist Daniel Kahneman can apply here: "Nothing in life is as important as you think it is while you are thinking about it."
3. Losing hurts. Seems like an obvious statement, but if we can keep in mind the concept of loss aversion, which is the theory that losses hurt far more than the enjoyment we get from gains of equal value, it may help keep knee-jerk reactions in check during volatile markets.

In short, doing the research, knowing yourself and how much risk you're comfortable with, and sticking to that plan you came up with can all help keep your emotions from overpowering your logical thoughts.