How to overcome emotional investing + 2 industries I love going into 2024 (bonus)
Investing with emotions is a losing game
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Happy Monday!
Let’s start the week off strong.
👉 Indexes: The rally continues.
👉 Investor sentiment: Bullishness is above its historical average for the 6th straight week.
👉 What is emotional investing: 4 important steps to overcome it.
👉 2 industries I love going into 2024: why these industries are set up for success.
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Weekly Market Update 🗒️💡
Indexes
As of Friday, the Dow has risen 3.8% on the month, while the S&P 500 has jumped 3.3% and the Nasdaq has seen gains of 4.1% so far in December.
The S&P 500 has hit its longest weekly winning streak since 2017 and is set to join the Dow with its own all-time high.
It’s currently less than 2% away from that mark, which we saw back in January 2022.
Communication Services/Utilities
Communication services lagged behind all industries this past week and is down 0.3%.
It’s the only sector in the broad index that fell on the week.
Utilities are in close second, but still climbed more than 1% on the week.
Stocks Rallying This Week
Boeing is set to hit its longest weekly positive streak in 18 years.
Shares rose about 8% this past week, marking its 7th winning week in a row.
The longest streak since late 2005.
Investor Sentiments
The percentage of bearish investors fell to just 19.3% this past week, down from 27.4% the previous week and well below the historical average of 31%.
Bullish investors rose to 51.3%, the most we’ve seen since mid-July, and up from 47.3% in the previous week.
Bullishness is now above its historical average for a 6th straight week, and 7th week in the last 10.
Overcoming Emotional Investing
There are 3 times when you should never make a decision:
when you’re happy
when you’re mad
when you’re stressed
Why?
Because bad decisions are made when emotions are involved.
Like successful businessmen/businesswomen, they don’t let their emotions get in the way of making a deal.
Whether it’s $10,000 or $1,000,000, the principles remain the same. The facts will always give you the answers and emotions will always be a barrier.
What is Emotional Investing?
Emotional investing, otherwise known as the “herd instinct” is the FOMO effect.
When the market is up, you buy out of greed. When the market is down, you sell out of fear.
For example:
Stock ABC announces a newfound technology in the company that is projected to make a big impact on revenues. Everyone starts talking about it. It’s on your Instagram feed, Twitter (X), and you hear about it from your friends. This “hype” creates a burning desire to buy the stock, which is a natural feeling.
Everyone’s talking about it, why wouldn’t you want to hop on the train?
The problem arises when this stock doesn’t align with your long-term financial goals.
Maybe you’re saving for a house or you’re near retirement.
And maybe your risk tolerance doesn’t fit the mold of this particular stock.
But you buy it anyway because it’s being talked about so much you can’t ignore this massive opportunity, or so you think…
Now sometimes these types of trades can go in your favour, but they’re few and far between.
The desire to blindly buy “hyped up” stocks and make a quick dollar will kill your wealth over time.
On the other side of the equation, we have fear. The fear of losing money.
As you know, the market goes up and the market goes down.
This is influenced by many different economic, geopolitical, and other factors that can cause large market swings.
Your stocks start falling and instead of staying the course, you decide to sell out of fear of losing more money.
Next thing you know, 5 years down the road that same stock has grown 5x your original purchase price and you’re kicking yourself for making a stupid financial decision.
Are you an emotional investor? Let’s find out.
Scenario 1
One of your best friends calls you at 12 pm on a Monday about a stock that is supposed to double in price over the next 6 months. What’s your response?
An emotional investor will let “shiny object syndrome” take over.
Doubling your money in 6 months is enticing, but you don’t know the full story.
Additionally, you have added pressure because it’s your best friend passing on the news.
Emotional investors will feel a sense of guilt if they don’t act on this opportunity because they want to win with their friends.
The correct response is to put aside your friendship and your desire to “get rich quick” and take some time to think it over.
Look at the fundamentals, analyze the ratios, and understand the business before putting your hard-earned money in a stock you just heard about that same day.
Scenario 2
Your parents made a killing during the tech boom because they had some extra cash lying around to play with. You’re just starting your career and trying to build a foundation of wealth, but you want to follow in the same footsteps as them. What’s your response?
Imitation is the greatest form of flattery.
But if you’re not careful, imitation will get you in trouble.
Especially if you’re not in the same financial position as someone else.
Your parents likely spent hours researching the tech industry. Plus they had money they weren’t afraid to lose and could handle the volatility that comes with the industry.
Just because they did it, doesn’t mean you have to do it.
Again, seeing others do well in the stock market is inspiring, but often once someone’s made a lot of money it’s usually too late.
Situations like these are what cause many investors to buy at the top and sell at the bottom.
We want to avoid that as much as we can.
How to avoid emotional investing
Step 1: Recognize you’re an emotional person
Being aware of the problem is the first step to resolving it. If you’ve always been scared of losing money and find yourself jumping at “get rich quick” opportunities, you likely have difficulty keeping your emotions in check.
However, being aware of this is the first step to correcting it.
Step 2: Diversifying your portfolio
The buzzword “diversify” gets thrown around a lot in the investing world, but for good reason.
Not having a diversified portfolio is often linked to overconfidence in one’s own knowledge of a specific type of asset or industry.
Putting “all your eggs in one basket” is a good way for the basket to break because the load is too heavy.
Also, with a highly concentrated portfolio comes more volatility. With more volatility comes the urge to over-trade.
Selling when things get bad and buying when things are going well is not the right way to invest, especially long term.
Step 3: Dollar cost averaging
Dollar-cost averaging, also known as DCAing, is a strategy by which an investor buys at specific times to balance out the volatility of the market.
Unlike investing in lump sums, you would invest a smaller amount, say every Friday morning, and stick to that plan no matter what is happening in the market.
This is a great way to take emotions out of investing because you’ve committed to investing on that specific day, regardless of whether your portfolio is up or down.
Ultimately, it helps resist the urge of investing too much when the market is booming, and investing too little when the market is not.