Emotional Investing

Having read “Rich Dad, Poor Dad” and following the advise of Robert Kiyosaki to let money work hard for you, I decided to invest some money in the stock market for some capital gain.  I brought into a stock which my colleague recommended as it is doing well recently.

Well, guess what, after 2 weeks, the price of the stock came stumbling!  My colleague advised me to sell it off, and stop the loss but I did not heed his advice.  I hate to sell it off at a loss, so I am holding on to it, in hope that it will rebound one day!

I know, I know…going by the rational rule of thumb, I should set a loss stop and sell it off once it hit the loss stop level, but…  I guess I am having my investing driven by my emotion which is actually a bad thing.

How do I shift myself away from emotional investing?  I guess I have to be more discipline, came up with a game plan and stick to the game plan closely.

Besides that, I also found some pointers from Jason Zweig, MONEY Magazine senior writer, on how to have better control of brain and emotions when investing.

Why do so many of us make such bad investing decisions even when we know better? A new breed of scientists dubbed “neuroeconomists” are starting to come up with some answers.

Blending neuroscience, economics and psychology, these researchers are delving into how our brains work when we set out to make money in the markets. The more they learn, the clearer it becomes that we’re wired to chase the big score — over and over again.

The good news is, this research also makes it clear that we can conquer our own worst impulses. These five strategies can help.

Control what’s controllable

Whether your investments beat the market is largely outside your control. But some things are entirely in your hands: cutting your tax and brokerage bills by trading less often, and keeping your expenses down by relying on index funds or lower-cost managed funds like those in the MONEY 65.

Kick the habit

If watching financial TV or clicking on investing Web sites gives you the itch to get rich quick, turn off the sound or use the “history” window on your Web browser to count how many times you visit the site each day. Just like a smoker trying to quit, you may need tricks like these to help bolster your self-control.

Chill out

“It’s important to realize,” says Stanford University neuroeconomist Brian Knutson, “that the magnitude of a long-shot reward is going to drive your behavior far more than the probabilities, which are minuscule.”

Making an investing decision while you’re inflamed by the hope of a big gain is a terrible idea. Instead, reconsider after your anticipation circuits have cooled off. If you like a stock, try waiting two weeks without ever checking its price. Then study the company’s financial reports to estimate the per-share value of the business. Afterward, you can check the current share price—and invest only if the business value is higher.

Separate your savings

If you still can’t resist “hot” investments, isolate them in a “mad money” account, funded with no more than 10 percent of your capital. Never put more than that at risk.

Plan ahead

A tip can itself be enough to inflame your anticipation circuits and overpower the analytical part of your brain. To reduce the odds that emotion will dominate your decisions, handcuff yourself in advance.

By dollar-cost averaging (automatically investing a fixed amount every month into a mutual fund or brokerage account), you can be sure most of your money goes to work on autopilot, where the heat of the moment can’t melt your resolve.

emotional investing