What happens when the emotional roller coaster of investing runs out of control? Are you at risk of losing thousands?
Illustrated in a 2018 Forbes article, The Cycle Of Market Emotions: Where Are We Now?, the emotional roller coaster was presented in emoji form. The dangers of falling to any emotional bias when investing is something everyone should be aware of. While we looked at an extreme example in our Three Parts to Growing Your Investments, falling victim to emotional investing can have catastrophic consequences.
The most prevalent form of emotional investing is relying too heavily on the market timing lever. As you can see in the above image, when the market is on the rise (a bull market), investor confidence is high. When this happens, most would logically assume that it is a good time to invest. After all, why not? The 6 o’clock news keeps telling us that the market is hitting new record highs every day. And with all that happiness and wealth being generated, it sure sounds like a good idea to jump on the ride!
But record highs mean that prices are up. You are actually paying a premium to enter the market. While we drive the extra 10 minutes to a store further away to save 10% on shoes, we’re suddenly prepared to pay extra for our investments?
On the other hand, when the markets are crashing (bear markets), our confidence is low. Prices are dropping and the Wall Street media yells and screams day after day that the end of times is near.
Looking at the above rationally, the best time to get in is when stocks are on sale, or at the lowest price point. This of course goes contrary to our emotional preferences, since when the prices are lowest we’re stuck somewhere between the anger, frustration and sorrow of how much we’ve “lost”.
Taking rides on the emotional roller coaster, trailing the ups and downs of the cycle of market emotions is exhausting. While the highs are euphoric, the feeling when the market, and our stomach drops out from beneath us is exhausting. Financial success is therefore not climbing on the emotional roller coaster. Instead, routine, automated investing will help average out the cost of our investments and capitalize on long-term economic growth. All while weathering, and prospering, through economic winters.
Don’t lose your money and your mind. When the roller coaster of emotional investing sends others into a spiral, trust in your automated system to steer you to financial freedom by the end of the ride.