Don't Get So Emotional About Investing

In the markets, a few simple steps can help keep one’s emotions at bay.

We don’t just battle the markets, but our own emotional stability and mental health. Open trades are a relentless feedback loop. For six-and-a-half hours a day, at a minimum, you get a real-time reading of how smart or idiotic you may be, and markets don’t discriminate based on experience, expertise or net worth. No matter what level you play the game, when you’re wrong, its agony, and when you’re right, it’s like getting a kiss from the world’s most beautiful girl.

We always point out that losing positions, while painful, actually provide a benefit in giving an immediate indication of which strategies aren’t working. Nobody likes losing money. But a small loss, if handled appropriately, is normal and perfectly manageable. Nobody is right all the time.

Where the wheels go off the track is it’s no longer our heads making investment decisions, but our hearts. Emotional investing never ends well.

So we have a fight with our significant other and decide to sell our winners to boost our spirits. Or we get bored with our mutual funds and decide to dive into leveraged exchange-traded funds for more action. Unsatisfied with our own performance, we double down on losing trades in the hopes a small pop will put us “back to even.” In my experience, all will set you back more money than the best therapist money can buy.

Given the stressors of investing, there are a few simple tricks to ensure your decisions are being made based on the economic realities of your portfolio – not your emotional stability.

There’s nothing particularly exciting about an emergency fund, the six to 12 months worth of living expenses every investor should have stashed away in a money-market or savings account. It’s even less thrilling when you’re earning nearly nothing on that cash.

Yet like fire insurance, an emergency fund is beneficial even if you never end up using it. Investment involves risk; any potential for profit comes along with the possibility of a loss. The emergency fund makes you, in effect, a much stronger hand in the marketplace. Risk is much easier to face when you know that month’s mortgage payment or gas bill isn’t riding on shares of iShares FTSE/Xinhua China 25 Index (FXI).

In many states, you can’t simply walk into a gun store and walk out with a pistol. Local and federal laws mandate “waiting” or “cooling off period” to diffuse any immediate -- and potentially dangerous – rush someone might have to use a firearm.

No similar restrictions exist for investments. And while emotional decision making can’t take anybody’s life, it can quickly wreck his or her portfolio.