Many people consider themselves emotional investors. They buy stocks because they like the companies behind them, and they tend to sell stocks when market conditions get worse.
With that said, being a sentimental investor can have a negative impact on your portfolio. For one thing, it can lead you to make rash decisions that lead to losses – like selling stocks during a market crash.
Also, while investing in companies you know and understand is actually a good thing, there are other considerations that should go into your investment decisions. These include how well these companies are doing financially, what their management teams look like, and what risks and opportunities they face in the coming years.
If you’ve been known to let emotions dictate your investment choices, here are some ways to avoid getting hurt in the process.
1. Learn how to check inventory
Whether you’re a fan of a company or not, it doesn’t have to really matter when it comes to investing. You might shop a lot at a particular retailer, but if their sales numbers are steadily declining and the outlook is poor, it’s not a stock to add to your portfolio.
Aim to learn about some of the different metrics you can use to research stocks from a financial standpoint. These include:
2. Commitment to the investment style
Many investors succeed with a system known as dollar cost averaging. With average dollar cost, you commit to investing a certain amount of money at predetermined intervals, regardless of what the stock values look like at that time.
You might decide, for example, to put $200 per month into a file Standard & Poor’s 500 Index fund, whether its value is up or down. Or you can choose to buy a specific company for $200, regardless of what its most recent earnings report looks like.
The whole point of dollar cost averaging is to take sentiment out of the equation. And often, if you stick with this system, you will end up paying less per share than you would have been trying to time the market.
3. Support your emergency fund
When the value of your portfolio begins to decline, you may panic and sell the shares before things get worse. After all, what if you need that money in a pinch? If that’s the case, you can’t let your balance keep dropping. But if you install a separate pile of cash in an emergency savings account, you may not need to give in to fear as much.
Ideally, you should have enough cash outside of your investments to cover at least three months of bills. For better protection, aim for the equivalent of six months.
4. Don’t invest money that you may need soon
As a general rule, it’s a good idea to only invest money in stocks that you don’t expect to need for seven years or more. The common logic is that you will have plenty of chances to recover from a market downturn over that long period. This means that if you’re hoping to buy a home in three or four years, you shouldn’t put a down payment in equity and hope for the best.
Some people are more emotional than others. But when it comes to buying and selling stocks, it can hurt you. If you tend to be an emotional investor, try following these tips to grow your wealth steadily without getting hurt financially.