In life, in love, at work and at home, emotions play a vital part in our lives. Emotions give us laughter and tears, joy and sorrow, hope and despair, love and hatred. As much as they fuel our will to live, they have the power to turn things ugly.
When it comes to investing, adding emotions into the mixture can be a recipe for disaster. In fact, someone even came up with a brilliant cycle to illustrate our emotions as our investments rise and fall.
| Chart 1: Emotional Roller Coaster of Investing | ||
|---|---|---|
 | ||
Source: Fundsupermart.com compilations
| ||
Here it is in its full glory, the emotional roller coaster of investing. The grey curved line represents market prices, the green dots positive emotions and the red ones are negative. Intuitively enough, when prices climb, we get a huge hit of endorphins and when prices dive, a raincloud just follows us over our heads.
WHY THAT’S BAD
You’ve probably heard of “buy low, sell high”. It makes complete sense, you buy when prices are low, sell when prices are high, pocket the difference, rinse and repeat and you end up with a mountain of cash. Of course, it’s easier said than done, especially when our emotions are hardwired to do the opposite.
When markets are on the rise, most people feel optimistic and they start buying more but also at higher prices. As optimism turns into excitement then into thrill and finally euphoria, they would have thrown all their cash in for financial instruments as though nothing could go wrong.
It does, and it goes really, really wrong. When markets start crashing, they get anxious but will still deny the fact, brushing it off as a minor dip before continuing upwards. Bad call, prices continue slipping and they start panicking, offloading everything they can before the storm. Unfortunately, it’s not that easy to sell everything off. They’ll be trapped with some holdings in hand which will continue shrinking. That’s when they give up and feel despondent.
… And the cycle continues.
The thing is, they have been buying high and selling low, effectively shrinking their wealth. You’d be surprised to know that many people fall to this trap.
WHAT YOU CAN DO ABOUT IT
There’s a way you can keep your emotions out of investing. It’s a very simple method called dollar cost averaging (DCA).
What it means is you invest a fixed amount of money in at intervals, maybe monthly or quarterly. If prices are low, you buy more units of the financial instruments, if prices are high, you buy less. Effectively, you’re buying at an average price. This helps overcome the fear of turbulent markets and the tendency to wait for a good time, while holding onto cash which doesn’t grow.
Although you won’t be buying at the lowest price, which nobody knows when that is, you’ll still be putting money into the market, which generally still moves upwards in the long run.
THEN THERE’S THIS
If you can’t handle the emotional toll of investing or simply don’t have the time, there’re those who can and would do it for you if you invest in unit trusts. Unit trusts are managed by fund managers who invest for you by pooling your money with others’ and trading financial instruments. These experts will do the buying and selling for you so you don’t have to lose sleep over how markets are performing.
That being said, unit trusts also have their own prices which go up and down. At least it doesn’t require active monitoring of the markets and you can always use DCA to acquire unit trusts at an average price.
There is of course a simple yet brilliant solution for this, Fundsupermart’s Regular Savings Plan. You can set the amount of money you want to invest every month. The transaction happens on the 15th of every month if it’s a fund trading day. The process is completely automated so you don’t have to lift a finger beyond signing up for the plan.
Source:Fundsupermart.com
Source:Fundsupermart.com
