When making decisions, investments, we know better to manage our emotions, investing and the use of logical based investment process. And when times get tough, we strive to give our emotions get in the way. When emotionally based investment behavior drives our investment decisions, consider that lose money. Recognizing the investment behavior, which allows you to invest your emotions get in our way, is an important step to keep them at a distance.
Richard Thaler and Cass Sunstein in his book entitled “Nudge: Improving decisions about health, wealth and happiness, we describe some of the emotions that investments tend to get in our way and how we can deal with them. When the market trend from lower left to upper right, you can easily get lost in some of this emotional investment.
Following the herd. It’s easy to go along with the crowd. If it is safe for them, it must be safe for me. Nevertheless, we must pay attention to those signals, which we have little to get something can not be right. This is especially true if our investment process tells us to take precautions. If our analysis tells us to be cautious, despite the fact that the crowd says, to take steps to protect your profits.
If your stocks are those that are discussed at all cocktails, you know, you become part of the herd. This does not mean that you should close these positions; it means you should rethink why you own them, should you keep them, and what is your exit strategy.
False sense of security. When things go well, investors might be lulled into a false sense of security. Markets will continue to grow our portfolios grow with him. We could even take on more risky investments, buying a hot stock market in an attempt to increase our revenues. When profits come Easy, investors tend to think that they know everything, and lose their sense of anxiety. When this happens, it indicates that you are vulnerable to large losses on the market should turn against us.
Whenever you feel this investment behavior, to reconsider their positions on the basis of what you are looking at what is going right and what can go wrong. Be prepared to take action if the positive trends turn against you. Always think that could change the current sound momentum. Few opposite perspective do not hurt.
Reduce risk. The best professional investors are always to focus first on the risk that they acquire. Furthermore, they articulate what they will do to manage this risk. Then they examine the potential return. When things go well, there is a tendency to ignore the risk you incur. After a good long-term action, the risk of reversal increases. If you are unable to formulate an increased risk you assume, it is a sign that you can avoid the growing dangers of your position.
To manage this investment behavior does not cease to do homework. Especially continue to assess the risks of their positions as they grow in value. Always use a strategy to reduce risks, which include selling part of your position after Nice ran. Be assured, your trailing stop where it should be. Consider using covered calls and protective puts when the parameters of risk may be higher. No one went broke selling positions that were profitable.
Forgetting to diversify properly. When we make money on the market and our portfolio grows in value, we strive to congratulate ourselves on the fact that we have a large investor. During our portfolio can become too concentrated in one asset without us even realizing it. This might work, if this asset class is one of the leaders in the market. In the end, the time will come when money will be transferred to other assets, leaving behind you. Worse yet, your portfolio may decline in a hurry.
To manage the investment of emotion, at least quarterly, preferably monthly, to assess how you have become too concentrated in one asset. If it looks like some shares increased significantly, it might be time to take a little bit on the table. Consider the sale of half of each winning position and put money to work in another and the surrounding areas. The other half of your best stock can save Running with Trailing Stop to protect your growing profits. Only now, you’re playing for money at home.
Investing emotion is one of behavior we can control, adhering to its rules. When our emotions get in the way of investment, we tend to make mistakes that will cost us. When things go well, is easy to forget to follow appropriate rules of investing. Take steps to recognize the symptoms, and then return to a proven investment process. Your portfolio will thank you.
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