Emotional investments: Why they happen and how to avoid them
Posted On March 24, 2022
Managing your investments – and emotions – amidst a volatile market can be stressful. In our newest episode, Joe Maier, SVP Director of Wealth Strategy at Johnson Financial Group, describes volatility as the macroeconomic reaction to uncertainty. And there is certainly plenty of uncertainty with Ukraine, massive inflation and adjusting to a post-pandemic world.
In this episode, Joe breaks down the consequences of making financial decisions solely based on emotion. He covers the psychology of loss aversion, regret aversion and herd mentality – and how these all factor into the decisions we make regarding our investments.
To make money on your investments, everyone knows you need to buy low and sell high. But if everyone knows this, why isn’t everyone making money? Not everyone makes money on their investments because they give in to their emotions.
“When there is acceleration down in the market … your brain is yelling at you, ‘Sell out before you hit the bottom,'” Joe explains. “Likewise, FOMO – your brain is telling you when everyone else is chasing an opportunity, you don’t want to be the idiot on the sideline that didn’t buy crypto or didn’t buy AMC.”
So, though you may know what the logical choice is, your fear of losing money or losing out on an opportunity causes your brain to panic essentially.
When our emotions are put to the test amidst a volatile market, this is where “human error” can occur. As Joe so adeptly puts it, “The portion of our brain that actually makes decisions … can’t interpret numbers, can’t interpret letters, doesn’t understand language. It only understands one thing, and that’s emotion. So, saying to our brain, ‘Don’t make an emotional decision.’ Is the most ridiculous thing in the world because the portion of our brain that is making decisions is emotional.”
Throughout the episode, Joe provides insight on how you can control these emotions.
Knowing how the brain works and how it affects your behavior can better equip you to manage your investments in a volatile market. Learn more about emotional investments and how to avoid them by listening to the full episode.
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