If you want to make money with your investments, keep your emotions out of the mix. Investment mistakes happen easily when your emotions run high. And your mindset is the greatest determinant of your financial success.
The problem is you can become emotional quickly if you have easy access to your investments. I realized this during my conversation with Bill last Friday.
Like lots folks, Bill was concerned about his investments. He had taken some ugly hits in the past and wasn’t interested in taking any more. When things looked bleakest back in 2009, he sold his investments. It took him a very long time to get back in and that cost him a lot in terms of missed opportunity. He told me that he made his investment decisions according to his “gut feel”.
This was a huge red flag. I suggested that Bill’s priority should be to find a strategy he felt comfortable with and stick with it no matter what.
That doesn’t mean Bill has to “buy and hold” through the bad times. There are plenty of alternative approaches that tweak portfolios in response to market conditions. Each approach has it’s pros and cons of course. No one method is perfect. But using your gut approach to investing is really risky.
Think back to the last 5 investments you made based on your emotions and you’ll have all the proof you need. So how do you put up a wall between yourself and your emotions?
1. Fire Yourself
Your first step is to recognize the power your emotions play and how dangerous they can be to your financial well-being. Without admitting what a threat you are to yourself, it will be difficult to keep your emotions at bay when you most need to do so. Fire yourself and don’t let those emotions slip in through the back door.
Neal’s Notes: It’s really hard to read the investment headlines and stay objective – but it’s critical to do so. Typically the headlines are misleading and usually point you in the wrong direction.
2. Investment Approach
Once you take your emotions out of the equation, you need to replace them with something. And there is no better replacement than a good solid investment strategy. Again, no matter what you do, there will be times when your strategy fails to perform well. That’s the nature of the beast but it’s far safer for you to have a strategy that is flawed vs no strategy at all.
3. Accountability Partner
No matter what steps you take, you will be tempted to override your strategy from time to time. This is especially true when times are tough. This is natural and unavoidable. But don’t cave in. Remember, once you override your system, you have no system at all and your investments will be ruled by your emotions. You might get it right once or twice but over the long-run this will cost you dearly.
The best way to stop that from happening is to have an investment accountability partner. Pick a smart friend and ask them to join your team. Take it up a notch and offer to be their accountability partner in return. Then, each month talk for about 30 minutes and review what you’ve done with your investments (if anything). Of course, it’s important to set up the ground rules before you get too deep in this. Here are some suggestions:
a. Commit to speaking for 30 minutes each month. Preferably on a fixed day like the last Friday of the month.
b. Explain what your investment approach is and commit to stick to it.
c. Commit to speaking to your accountability partner before deviating from your strategy.
If you implement these ideas, you’ll have a higher likelihood of keeping your emotions out of your investment mix. As a result you’ll have far better long-term investment results.
Are you getting emotional about your money right about now? What are you going to do about it?