Stock Market + Emotional Investment = Certain Disaster
Understanding the way in which emotions can influence investment decisions is perhaps best accomplished by comparing speculators to investors. Unless you have money to burn, you want to be an investor.
Most speculators think that they are investors, but history proves otherwise. Speculating as to which stock will be the next to shoot through the roof, when to buy and when to sell is really just a form of gambling. For some, the gamble pays off. However, as with any casino game, the odds cannot stay in the investor’s favor for very long. Speculators listen to the hot stock tips; they try to anticipate what will happen next, but their opinion is usually based on nothing but conjecture. They “have a feeling”. They heard from a friend of a friend that the stock they just bought was going to do particularly well. There is certainly no science to speculation.
Investing, while not a sure thing by any means, is a much safer way to “play the stock market”. Investors don’t buy and sell as often as speculators – they don’t have to. Before purchasing any stock, the investor carefully examines the company involved, taking their financial health, history and future potential into consideration. They choose stable and established companies and when they do go out on a limb with a riskier stock, they balance it out with a safer choice. The investor will not put all of their eggs in one basket. Their portfolio is comprised of stocks from a wide range of industries and companies and also contains mutual funds, bonds and other investments.
The investor has a much easier ride through the stock market. Once their portfolio is established, they perform only routine maintenance, checking on the performance of their stocks monthly, bi-monthly or even semi-annually. If one in particular is dropping in value, they will reevaluate the company and decide whether to ride out the dip or cut it loose.
The speculator, on the other hand, by making an emotional investment, whether he/she thinks it is or not, frets over his stock choices on a daily or weekly basis. He must stay ahead of the game, trying to anticipate what will happen next. He wants to buy low and sell high. His emotions again come into play when the hot stock he heard about turns out to be a dud… he doesn’t want to let it go, because he really likes that company!
There is no room for emotional investment in the stock market. A strategy and portfolio built to withstand the test of time is the only way to limit risk over the long term. Sure, you could get rich taking your chances… but you will more likely end up with an ulcer and barely enough change left over for a cup of Tim Horton’s coffee.