The stock market specializes in inflicting emotional turmoil. It tests your ability to withstand financial pain, trying to shake you out of a bull market well in advance of its eventual peak and rallying just enough in a bear market to convince you that the worst has passed (and to retain your positions) before plunging further. And with increased volatility compressing moves that used to take years into months, and moves that used to take months into weeks, it’s no wonder that investors’ emotions are becoming more easily frayed in the global, nonstop trading environment we’re experiencing.
Preparing for financial battle involves not just having capital to invest, an investment discipline to help guide you, and a risk management view on your holdings, but also knowing how you’ll react to potentially sudden, sometimes violent market swings that can last for weeks on end with your hard-earned capital on the line. Your answers to the following questions will help define your emotional investment profile:
- What are the limits of your tolerance for financial risk and monetary pain? Do you set boundaries?
- Do you have more than enough money in reserve in case something totally unexpected occurs? Are you a sound financial planner?
- Are you able to effectively process the information necessary to make a sensible investment decision in tumultuous times, or do you tend to remain passive and not face the situation?
- Are you able to go to sleep without waking up in the middle of the night to obsess about what the next day holds?
- Are you a nervous, patient, or complacent individual?
- Are you the type of investor who buys a large position in a stock with a tight “stop” (risk tolerance point), or the kind who purchases a smaller equity position with a looser “stop”?
- Do you have the patience to hold a stock that’s performing satisfactorily, or are you more apt to trade shorter term?
- Do you find it hard to take a contrary investment view when the prevailing market sentiment is overwhelmingly aligned against you but your analysis is saying otherwise? Does crowd psychology affect your thinking and decision-making?
- Can you take a loss or multiple losses in stride as part of the investment process? Can you admit mistakes and not make excuses?
- Are you flexible or stubborn?
- Do the market’s movements affect your mood and temperament? Are they affecting how you act outside of market trading hours? Are they infiltrating your relationships with family and friends?
- Can you act once an investment decision has been made, or do you tend to freeze up and second-guess yourself by being overly analytical?
- Are you an investment optimist, preferring to look at a best-case investment scenario, or do you prefer to look at a worse or worst-case outcome?
I’m not a medical person but I can tell you this: nothing investment related is worth your health. If you cannot successfully deal on a sustained basis with your market emotions, find a highly respected professional to help you do so or don’t invest in the stock market. In addition, and as I noted earlier, if you’re not willing to take losses and admit mistakes, then the business of investing or trading in the stock market isn’t for you.
Preparation is a necessity in both the stock market and in life, and a key portion of that preparation is emotional. Relationships are stressful, and when you invest in the stock market it’s not just your monetary relationship that needs to be regularly monitored. Your emotional composition constitutes a large part of your investment success or failure, so getting in tune with it is vital. Remember, not everyone is psychologically suited to invest in the stock market. It’s a volatile arena in which your money isn’t the only variable on the line.
Any relationship can be draining when things aren’t breaking your way, whether it’s in finance, romance, business, or your other day-to-day personal encounters. Sometimes a partial position in a stock should be sold to let you more objectively analyze the remainder of that equity position, while also reducing your stress and worry levels. It’s called “selling down to the sleeping point.” Relationship-wise, it’s like seeing one another less frequently in order to step back and reassess the situation.
Many of us don’t like to examine our personalities in depth and honestly admit our shortcomings, but we know that relationships can become healthier when we do precisely that. That includes your stock market relationship as well. In short, know thyself!
Moral: Knowing yourself and how you’ll react in various market situations needs to be addressed as part of any investment discipline. Emotions are a crucial and underdiscussed component of the investment process. Most investors don’t want to face their emotional shortcomings. It’s like analyzing any other weakness—uncomfortable and bothersome. But bother you must. Be as truthful with your investment self as you would be in your valued personal relationships. Honesty is, indeed, the best policy in both instances.
(To be continued...)
This excerpt is taken from “Relationship Investing: Stock Market Therapy for Your Money” by Jeffrey S. Weiss. To read other articles of this book, click here. To buy this book, click here.
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