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Why Emotion Is The Enemy Of Investing

By Mark Riddix

Emotion has its place in everyday life but not when it comes to investing. The worst investment decisions are often made when investors get too emotional. You should never allow yourself to become too attached to any investment that you make. It is critical to keep a rational mind and to only make investing decisions when you are cool, calm, and collected. This will keep you from paying too much or selling too cheaply. Here are three emotions that can be detrimental to your financial future:

Fear

When was the best buying opportunity of your lifetime? The March lows of 2009 offered long-time investors an incredible opportunity to buy shares of large household names for pennies on the dollar. Companies like Bank of America, General Electric, and Wells Fargo were all trading in the single digits. So, why did most investors not buy up shares of these historic franchises? The answer is fear. Fear is the enemy of investing because it keeps you from taking advantage of once in a lifetime opportunities. The best time to invest in an asset is when the general public is afraid. As Warren Buffett always says, “be fearful when others are greedy and greedy when others are fearful.”

Anger

Have you every sold off a great investment because you were frustrated by its performance only to see it surge after you sold it? Speaking from personal experience, there have been too many occasions where I have sold an investment out of frustration only to see it perform well a year or two later. If I had a penny for every time that I have done that I would have quite a few pennies! Anger can make you dump a great idea just because you are tired of waiting for it to show progress. Overreacting in anger will rob you of your best investments and entrepreneurial ideas. If you give in to anger, some of your best ideas may end up being discarded just out of frustration. Remember to always remain calm in business. As long as your underlying thesis for your investment has not changed, neither should your emotions.

Greed

Jim Cramer sums it up best when talking about investing. Cramer says “bears make money, bulls make money, and pigs get slaughtered.” You should always have an exit point for every investment that you make. Whether it is real estate, stocks, bonds or a business venture, you should always have a price in your head in which you are willing to sell. Too many investors hold onto investments too long simply out of greed. Greed caused many tech investors to hold onto shares of Motorola and Yahoo at extremely high valuations. Greed caused many real estate speculators to continue buying homes at absurd prices. Knowing the price to buy is important but knowing when to sell is equally important. Avoid falling in love with any investment that you make because a time may come when you have to sell.

Have you ever allowed your emotions to get in the way of a great investment or business idea? If so, when?

(Photo credit: sskennel)

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, Your Financial Playbook.

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  • http://knsfinancial.com Khaleef @ KNS Financial

    This is exactly why I cringe when people speak of “rational” investors. They are few and far in between – and are usually the most successful over time.

    I find that most investors are emotional and irrational – which is why short-term movements in the market are so difficult to predict.

    • Mark Riddix

      I agree. Rational investors get the best returns because they do no overreact to the short term market hiccups.

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