“You have power over your mind – not outside events. Realize this, and you will find strength.”
“Your mental and emotional approach to the market will to a great degree dictate your investing success.”
I’m not sure how many times I have told my students that in the past 18 years—but I bet it numbers in the hundreds and for good reason.
I have seen so many bright, market-savvy traders and investors lose most or all of their accounts because they allowed highly-charged emotions to direct their buying and selling decisions.
Indeed, researchers have confirmed that the emotional part of us that thinks, feels, hopes and aspires, has a great deal to do with our portfolio’s bottom line.
At one time or another, most traders and investors, fall victim to potent emotions that lead to impulsiveness and greed (I’m loading up on this moonshot stock because it’s gonna buy me a new Corvette!”), or fearful, anxiety-driven actions (“Good grief. The market’s sinking. I’m selling all my positions now, before I lose all my money.”)
Even if the emotions that drove these decisions are detrimental, they make sense to us at the time. After all, we are human, and the markets are unpredictable and wide open to interpretation.
Now, here’s the good news. We can take command of our emotions and direct them to help—not hinder—our market decisions.
Below are three personal qualities that can help strengthen our mastery of investing include the ability to control impulses, the ability to regulate moods, and the ability to keep anxiety from interfering with decisions during periods of high-stress.
Regulate Your Risk-Taking. Did you know that each of us is born with a high, moderate, or low-risk tendency? I inherited my father’s love of risk. My ability to tolerate high-risk situations—especially in the market—lost me a big chunk of money in my early years as a trader. Fortunately, I became aware of my “adrenaline junkie” nature and was able to recoup my losses.
Each of us needs to be aware of our personal propensity toward impulsive risk-taking, and rein it in, if necessary. Taking uncalculated risks in the market can provide a quick adrenaline rush, but the results can be disastrous. Enter new stock positions only when they align with your risk-management strategy and your investing objectives.
Remain in Control of Your Moods. Next, for the sake of making wise decisions, we must avoid allowing the market to dictate our emotions. This syndrome occurs most with those who glue themselves to the market on an everyday basis. When the market moves higher, they are happy. When it moves down, they feel miserable.
To add insult to injury . . . did you know that we humans feel sensations of pleasure when our account balance rises, but in contrast, feel much deeper feelings of pain if it falls by the same amount of money? Result: odds dictate you’re going to feel more pain than pleasure if you allow the markets fluctuations to control your emotions.
And, by the way, this pain can cause you to make hasty risk-management decisions.If you find your happiness linked to the market’s moods, consider placing automatic stops with your broker. Then take a vacation from watching the market on a daily basis. Remember, it’s your overall approach that counts and that will drive your gains/losses success.
- Remain Calm During Periods of Volatility. Finally, one of the most challenging skills to which we can aspire resides in the ability to keep anxiety and fear from interfering with decisions during periods of high-stress.
One of my most vivid memories goes back to September 11, 2001. It was four days after that horrific event, and the New York Stock Exchange was just re-opening. None of us knew what to expect. Admittedly, we were all scared. Would a wave of uncontrollable selling hit the market? Would we see our portfolios value vanish in front of our eyes?
As an active trader and investor, I had read some of the thousands of emails (in those days, we didn’t have Facebook or Twitter) that had circulated among market participants during the prior four days.
“When the markets open, don’t start selling,” the emails said. “Let’s not give the terrorists the satisfaction of seeing us scared and fearful.”
And we didn’t. We held our ground. And to a great degree, the market remained calm.
Now, when the opening bell rang, I knew where my protective stops were. And although the market gapped down slightly that morning, my stops were not touched. I kept my positions in place.
I believe that day was a tribute to humankind’s ability to think rationally, manage personal emotions, and respond with a heroic approach—all in the face of extreme duress.
To achieve success as investors, we must recognize that our emotions impact the decisions we make. When we approach the market with a calm, well-ordered, anxiety-free mindset, we are most able to make decisions that lead to success.
Until next time, keep green on your screen,