Emotions play an important role in some of the most important decisions we make but
when it comes to investing, emotions can do more damage than good. Most of us think we’re making rational choices but when it comes to financial matters in reality we’re often not.
Three ways that emotions can play a detrimental role in our investment decisions.

  1. Following the heard and FOMO. (Fear of missing out)

Many investors find comfort in knowing that many others are investing the same way they are and they get caught up in the media hype on a certain sector. Many also worry that they are missing out on something and need to also be one of those investors.

2. Extreme thinking

When markets fall, people often start to think in extremes. Everything in the market begins to look black and white. Instead of asking questions about why the market is falling, they assume that all news is bad news and that property prices will continue to fall

When markets fall, people often start to think in extremes. Everything in the market begins to look black and white. Instead of asking questions about why the market is falling, they assume that all news is bad news and that property prices will continue to fall

3. Short term bias

Recent memories tend to be stronger than distant memories. This means that recent market gains lead to excitement and higher expectations. On the other hand, recent market losses lead to suspicion and caution.

Letting your emotions drive your investments is a sure-fire way to disaster because we tend to be most optimistic near the peak of the cycle, at a time when we should be the most cautious and we’re the most pessimistic when the media is full of the doom and gloom near the bottom of the cycle, when there is the least downside.

The key for investors is to stay focused on the long term. Before we react emotionally to short-term market gyrations, we should ask ourselves some important questions. What is our long-term goal? Have our goals changed? Was our plan to reach our goals a sound plan? Are there any good reasons to abandon our plan? Once we have asked and answered these questions our decisions are more likely to be driven by logic, not emotions.

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