Is emotional investing good for your finances?

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Humans are capable of losing their sense of rationale over sheer impulse. Emotions often overrule a decision that would otherwise make complete sense. This can get worse with money matters. We’re overtly emotional beings who also seem to chase money like no other. It can get pretty messy if one isn’t able to keep their emotions in check while making an investment choice. Showing your emotions and being your true human self is important on many occasions in life and can indeed be a great thing. But not when it comes to investing.

Oxford Risk defines ’emotional investing’ as trading governed by a trader’s behavioral impulses, with the buying and selling of investments based more on the back of markets’ daily gyrations than on any obvious fundamentals.

“Being emotional about money isn’t the right approach to begin with. It can force you to make decisions that may be harmful to your portfolio. One should always be aware of the subtle difference between being right and being emotional about money and investments,” Pranjal Kamra, CEO at Finology Ventures and a YouTuber told Money9.

The answer lies in goal-based investing to be free from such emotions. Your child’s higher education, marriage, a comfortable retirement, a good house to live in are some of the major financial goals of your life. But there is an emotional feeling attached to each of them. When you keep such powerful goals at the center of your money discussions, you’re expected to have an additional impetus to do the right thing and invest properly. Emotions mustn’t come in way of smart investing.

“Goal-based investing helps you stay on track. Investors who invest randomly/emotionally and don’t have goal-tagged investments find it difficult to handle volatility in the markets. And volatility is the most common trait of the market. I believe that goal-based investing increases the chances of reaching your financial goals. And you also end up saving taxes,” said Dev Ashish, founder at StableInvestor.com.

Think of it – if you have a five-year old daughter and you are investing for her higher education, which is 13 years away, then it really doesn’t matter what the markets are doing in the near term. If you are simply investing to beat the index or someone else, then these levels are important. But if you plan to use the money to reach your real-life goals, then you need to think about investments as a way to achieve those goals rather than just chasing returns. You’ve got to be smart, patient, and definitely not emotional about your money.

Emotional impulse often makes it hard for investors to stand market volatility. This means a bull market would result in extreme piling into every kind of investment like stocks or other trending asset classes. On the other hand, a bear market may result in a sudden sell-off due to heightened noise and herd mentality kicking in alongside your emotional impulse, of course. This would result in you standing literally nowhere in the present or future. Investors can’t afford to remain as variable as the market movement itself. One needs to resist the external pressure to yield results.

Meanwhile, as per Avinnash Gorakshakar, research director at Profitmart Securities, “When anyone starts investing early, one must have strong emotional character and focus on their investment decisions as it will help them to compound wealth in a big way without bothering about short term price volatility which anyway gets averaged out if your choice of equity investments has good long term prospects backed by strong promoters.”

This focus will build wealth in a sure-shot way with manageable risks that can be mitigated by proper stock selection. However, your focus should be calculative and logical. Don’t take any decision in haste, anxiety, anger or simply to stand out. Always think about your farthest goal and consider whether your next move will add anything to it. If not, don’t take the step even if it sounds tempting today.