Three ways to beat your own worst enemy when you invest

Julie Brownlee, Fsp Invest, 16 Oct. 2014

Tags: emotions, invest, beat emotions when investing, investment strategy, making investment decisions,

Your emotions are one of the major influences on the investment decisions you make.

Unfortunately, your emotions usually lead you to make misguided decisions. And in the process lose you money.

It all comes down to the wiring in your brain. It evaluates economic and investing information using pathways linked to your emotions.

So how can you overcome your emotions when you invest?

Read on to find out…

Your emotions mean you usually make the wrong investment decisions

Your emotions play such a big part in your investing. Generally speaking, if you’re happy, you’re likely to buy shares. If you’re sad or fearful, you’ll sell shares.

But this is the opposite of what you should do, Keith Fitz-Gerald in Money Morning US explains. This means you’re losing money in the market. And chances are you’re not even coming close to the market’s overall performance.

So what can you do to remove your emotions from your investment decisions?

There are three ways to do this...

#1: Use asset allocation and stick to it
Diversification has its benefits, but you need to do this in such a way that it’s effective. You need to apportion your investments according to risk.

For instance:

  • 50% of your investment cash in core assets;
  • 40% of your investment cash in growth and income stocks; and
  • 10% of your investment cash in speculative positions.

You then need to regularly rebalance your portfolio. This forces you to buy low and sell high, and not do the opposite like your emotions want you to do.

#2: Buy when the market is in chaos
When everyone else is selling, you should be buying. This also lets you buy shares at low prices. And it means you have a chance to pick up shares in fantastic companies at a great price.

Think of it as a stock market sale.

#3: Manage your risk
Use trailing stops to protect your money in the market and keep a lid on risk. Using trailing stops also stops you letting your emotions drive your selling decisions.

You could think about using a 25% trailing stop for instance.

So there you have it, three ways to beat your own worst enemy when you invest.

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