Successful investors possess the important trait of emotional stability, which means that they base their investment decisions on practical and calculated information. Emotional investors, on the other hand, are guided by their emotions. (To learn more about how emotions can influence your decision-making process, read When Fear and Greed Take Over.)
You know you are an emotional investor if:
- You sell your stock if it falls a few cents. The decision to sell a stock should be the result of careful consideration. If you sell a stock because it pains you to lose a penny, you're an emotional investor.
- You are fixated on stock news. Part of being an investor means keeping abreast of market news. However, if you are not a broker or an employee of the financial services sector, monitoring the stock market 24 hours a day is not healthy and indicates that you could be an emotional investor.
- You celebrate unrealized profit. Unrealized profit is profit gained from an item if you were to sell it at a particular moment. For example, if you buy a stock at $20 and it rises to $40, you have an unrealized profit of $20 per share. Jumping for joy over unrealized profit means you're probably an emotional investor.
- You fear stock updates. If you avoid checking stock prices because you fear price decreases, you're an emotional investor.
- You panic about bad news. The rational way to handle bad news about the stock market or a company you're invested in is to calculate the effects and make a decision accordingly. If you panic at the slightest hint of unfavorable news, you're an emotional investor.
- You make frequent calls to your broker. The stock market undergoes frequent fluctuations during any given day, so unrealized gains, followed by some losses, are to be expected. If you call your broker every five minutes to check the value of your investment, you're an emotional investor.
- You mourn unrealized loss. Unrealized loss is the opposite of unrealized gain. It is the loss you would experience if you were to sell a particular item at a particular moment. Using the stock from the example above, you would experience an unrealized loss of $5 if the stock were to go down to $15. If you grieve these kinds of losses, you're an emotional investor.
Good investors are not emotional; they remain calm, rational and level-headed, despite the innate climate of volatility in the stock market. Being an emotional investor does not mean you cannot be successful in the stock market. However, it does increase the chance that you will miss out on gains and potentially lose money if you are not able to cap your emotions and curtail the impulse to make decisions based on the natural ups and downs of the market. Different temperaments require different investment strategies; therefore, it is important that you take the time to find investment strategies that work for you.