Keeping emotions and investing separate seems almost impossible for many investors, however keeping emotions away from investing is crucial to successful investing. The task is not impossible if you follow these four tips on how to keep emotions and investing separate.
1. Do Your Own Research & Understand What You Invested In
Knowing what you are buying is key to avoiding emotional set backs in investing. Always do your own research before purchasing a security, even if you are using a financial adviser. Understand what the investment is, how it will help you achieve your goal and what the risks are. Without your own research, you will not take full responsibility for your trades, introducing negative emotions.
2. Set Financial Goals
Setting financial goals is the first step to investing, financial goals can keep emotions out of the picture if done correctly. Having financial goals will help you keep an eye on the big picture, for example if you are saving for retirement in 20 years you know that you have plenty of time to make up losses.
3. Stop Checking Your Investment Portfolio Constantly
You probably have the urge to check up on your investments everyday, maybe even every few hours, STOP! Just stop checking constantly, it will not benefit your portfolio in anyway, it may just cause more anxiety. This is even more important if you own individual stocks or mutual funds in any kind of personal account or retirement account. Checking these too often can cause you to panic and you can make a snap reaction trade. Just stick to your plan and ignore everyday movements.
4. Develop an Investment Policy Statement
An Investment Policy Statement (IPS) is your guide to investing, it will help you through the rough times and will keep you focused on your goals. In an IPS you will have detailed investing strategies, including buy and sell strategies. As long as you stick with your IPS keeping your emotions out will not be difficult. [You can download this IPS worksheet]
Money is always an emotional subject, but often when our emotions get involved with our investments we will make wrong decisions which will end up costing us too much. Keeping emotions out of investing may seem difficult but if you follow the tips above you should be able to accomplish it.
If you need more tips see Four Pillars How to Deal With Market Volatility
What are your tips? How do you manage to keep your emotions out of your investing?