An emotional attachment to money, and the fear of losing it, has cost people more money than anything else in their investing careers. Fear is not something that is possible to eliminate, but those that are able to control it are going to be the most profitable in the market. At the same time, this is not the only emotional factor that plays a role in investing. It is important to know a little about as many emotions that impact trading as possible.
One of the greatest emotional poisons to any trader is to have too much confidence in their own abilities. Many traders starting their career in the market really believe that they are the one who can tame it. They think that they have been gifted with some ability to read the market which others do not have. The market can and will prove these arrogant traders wrong on a frequent basis. When the market plunged 777 points on September 29, 2008 you can imagine how many overconfident traders were finally humbled (Marketwatch.com).
Being excited about investing is a precious and wonderful thing. However, you should always have a reason for all of that excitement. There are plenty of investors who become overly enamored with particular investments that they have heard about or possibly are currently in possession of. An investor may hear about how some stock is going to be the next big thing and thus run out and purchase it. They do all of this while skipping out on the very fundamental research that makes up all good investments. This is sometimes known as investing in a “whisper stock”. It is called this because of all the “whispering” going on in the investment community about this particular stock. When you go out and purchase an investment on blind enthusiasm like this, you are going to lose money more often than profit on your investment.
Although almost never mentioned, apathy can be just as much of an emotion influencing trading as anything else. Apathy is not particularly being concerned with trading. It impacts the markets because there is not as much liquidity in the market due to these individual’s actions. Not only are these individuals harming the markets, but they are also harming their own chances of being able to retire and live the life that they really want to live. According to AARP data, nearly 80% of the baby boomer generation intend on continuing to work (Calcpa.org). This is because of the apathy these individuals showed towards investing and saving during their prime years for working. Apathy could perhaps be considered the cardinal sin of emotions to show towards investing.
As mentioned in the introduction, fear is a very huge factor emotion for market activity. Although many think of this emotion as the opposite of overconfidence, that is not the way in which it functions in the market. Rather, fear impacts basically every trade that people take. We all have to have a healthy measure of fear when investing. If we did not, then we would always be putting our money into investments that were far too risky. At the same time, having excessive fear is not a good thing. If you have too much fear, then you are likely to sell your investments off too soon. Investors with too much fear will sell at the first slight drop in the price. It is important to remember that the market is constantly moving stocks up or down in value all the time. A stock movement within one particular day may make almost no sense at all. It is only over the long run that the good investments start to pan out. You will never eliminate all of your fear in investing, but you should try to keep it at reasonable levels.