Whether we know it or not, our money decisions are closely linked with feelings of pride, fear, hope and regret. Investing, in particular, can bring out intense emotions because it involves the potential for both risk and reward. This is why emotional investing is a common experience for most people. While emotions cannot be removed – they’re a healthy part of being human, after all – it is important to understand they may affect investment decisions negatively and how we can manage them to mitigate their impact on money matters.
Table of contents
The positive role of emotions in investing
Contrary to popular belief, emotions are not always harmful in investing. In many ways, they can help us focus on what truly matters.
- Linking investments to goals: Saving to buy a home or for retirement are deeply personal goals. When investments are tied to these life goals, emotions like love and responsibility can keep us motivated to continue investing even during difficult times.
- Purpose gives meaning: A sense of purpose helps us view investments as a tool to eventually achieve something valuable, rather than just chasing the potential for short-term gains. This reduces the temptation to constantly tinker with the portfolio.
- Commitment through ups and downs: Markets will always move up and down. Having an emotional connection to a goal can help us stay disciplined in markets and avoid abandoning a plan during periods of short-term volatility.
In these ways, emotions can be very helpful, turning investing from a mechanical task into a meaningful journey.
Also Read: What are money market funds?
Where emotions hurt in investing
While emotions are often helpful, they can have a negative effect.
- Overreaction to news: Daily headlines about market crashes or booms can trigger emotional investing. A sudden fall may push some to sell too quickly, while a sharp rise may create the fear of missing out. Both of these can disrupt long-term plans.
- Panic selling in downturns: Fear and panic can significantly influence our decisions. Selling everything when prices fall sharply may bring short-term relief, but it can also mean missing out if markets recover over time.
- Chasing hype and trends: Excitement and greed can be just as harmful. Jumping into “hot” stocks or sectors without adequate research can lead to disappointment. Following the crowd may feel right in the moment, but it may not always align with long-term objectives or risk tolerance.
Finding the balance
The skill lies in balancing logic and emotion in investing. Both have a role to play. Some practical steps can help attain this balance:
- Set clear rules: Decide in advance how much to invest, how much risk to take, and under what conditions you will make changes. Rules act like a safety net when emotions run high.
- Automate where possible: Using SIPs or automated transfers can reduce the need for frequent decisions. This may help reduce the tendency to react emotionally to every market move.
- Review periodically, not daily: Looking at investments too often can increase stress. A periodic review, say every six months, keeps you informed without triggering unnecessary worry or excitement.
How to make investing both logical and personal
Investing isn’t just about looking at numbers on a screen. It’s about what those numbers mean for your life. Balancing logic and emotion in investing is therefore essential. Logic ensures that you stay disciplined in markets and follow a plan, while emotion provides the motivation to continue the journey for years. Allow your emotions to give you direction, but don’t let them take control of every decision. A thoughtful mix makes investing both practical and personal.
Also Read: Exploring Behavioural Finance and Understanding its Basics
Conclusion
Emotions will always be part of money decisions. They can strengthen our connection to our goals and help us stay committed. However, at times, they can also lead us into panic selling or chasing hype. By setting rules and reviewing calmly, investors can strike a balance between logic and emotion.
At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe, which combines the Information Edge, Quantitative Edge and Behavioural Edge. By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.
Home
Contact Us
Login
Downloads
Schemes