Boomers, Markets & Money

A Down-to-Earth Discussion of Financial and Lifestyle Information for Baby Boomers


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How to Handle Emotions When Making Investment Decisions

We all struggle with emotions regarding money. Making major investment decisions without safeguards during periods of extreme emotion can work against us both in down and up markets.

I saw a helpful interview on Bloomberg TV this week. Greg Davies, Barclay’s head of Behavioral Finance, offered some tips on how to make better decisions when you feel your anxiety spike.

  • Develop habits over the years that you use regularly. A well-thought-out routine will help you make sound decisions when events rattle the markets. So, at a time when the markets are calm and you feel coolheaded, write down what you should do. Read it when you feel anxious. He said it is critical not to wait until the last minute when you are in a very stressful situation. A checklist can be one way to organize your plan.

    Milo contemplating his next move...

    Sleep overnight on major investment decisions. (Click to Enlarge)

  • Have a cooling down mechanism planned. Davies suggested planning on sleeping overnight on a decision to make a major change in yourinvestment portfolio. Or you could have a plan to talk to a trusted friend or financial advisor before acting on a major revision.

We’re all familiar with those uncomfortable feelings that pop up during major market declines. But emotions can work to an investor’s detriment during stock market upswings, too.

I can’t help wondering if a little stock market euphoria is developing now. I saw four commentators make optimistic comments about the stock market during a segment on CNBC this week. Ralph Acompora exclaimed, “I’m so excited! We have years left!” When I heard that, I felt really uneasy.

I had visions of CNBC anchors putting on Dow 10,000 hats the first time that level was hit. (For your amusement, I have included a link below to a pictorial of the Dow 10,000 hat.) Investors can feel pressure that they are missing out on a rally and buy in at market peaks.

As Warren Buffet said, “You try to be greedy when others are fearful and you try to be very fearful when others are greedy.”

Sources

“Old Hat: Dow 10000, a History in Headwear” by Matt Phillips. The Wall Street Journal

“How to Overcome Emotional Responses in Investing”   Bloomberg Television Video.