There’s nothing emotional about it!!!
Are you someone who is invariably emotional? Feeling a sense of attachment to every other belonging that you have? If your answer is in the affirmative then maybe investments in risky instruments like stocks and derivatives may be riskier for you!! This is because feeling a sense of attachment to your investments might be the biggest threat to your investment plans itself!
Investments in Equities, derivatives and other such instruments entail a big element of risk. If you don’t know what you are getting into then you might get yourself into a lot of trouble. So when the decision has been taken to enter such investments it is better to be prudent rather then getting emotional!
Let me explain how!
Case I
Let’s say you bought a share of a company ABC Inc. at $50 a share based on a “hot tip” that the shares will touch $70 in 3 months time. After 1 month the price of the share of ABC Inc. tumbled to $45 and within the next 15 days it goes down to $39. You continue to hold on to the share in the hope that it will bounce back to original level and also grow further.
This is an example where the concerned investor showed emotion rather than prudence.
- Buying a share based on a hot tip without even bothering to go through the fundamentals of the share is at most an emotional decision without any basis and it is nothing more than a gamble.
- Moreover, a prudent investor in the times of sudden crash of a share would likely investigate for the reasons of that fall. If sufficient reasons are found then the first aim should be limiting of loses to minimum. Continuing to hold a falling share (with nothing to prove that there’s nothing wrong with the share or the company itself) would be suicidal! Experts usually always advise to limit loses to a maximum of 8%. But then this figure can change if you have sufficient confidence in what you are doing with the backing of substance of course.
Case II
In this second scenario, let’s assume the shares of ABC Inc reach the promised $70 in the next three months. You had bought the shares at $50 so you are now set to make a gain of a cool $20 per share. But somehow this gain is not enough for you and according to your ‘research’ it may climb up to $90 in some time. So you decide to hang on to the shares.
Well there’s nothing wrong with such a strategy only if it is backed with reason and sufficient substance. But then you had ‘researched’ for its estimated price and everywhere found that the shares have potential to climb, isn’t it? There lies the biggest flaw as in our emotion to believe in a certain line of thought we tend to look at only those details which affirm our inner view rather reading at those fine prints which subtly warn us about the storm ahead.
Instead of searching for views affirming our stand, if points of argument and contradiction are focused upon then I am sure a much better decision would follow which has considered most aspects regarding the issue.
The above two points of argument illustrate two common cases when emotions tend to take the driver’s seat!! Classic scenarios of emotions running wild are when the markets take a plunge fearing some danger or create new climbing records anticipating positive ‘news’. This is when many an investors tend to lose focus and get carried with the tide losing everything in the process. The shrewdest investors tend to make money when the crowd is running out of the market because they anticipate the storm and plan for it accordingly.
Concluding, I would like to emphasis that emotions never mix with investments. So if you have decided to take the plunge with your hard earned money it’s much better to be wise and take the decisions based on hard facts rather than pure emotions because you never know when the storm blows you and your money away!!!