5 Ways to Break The Emotional Cycle of Investing

Posted Thursday, May 27, 2021

6 eggs with different funny faces drawn on them

Mixing emotions with investing is like mixing water with grease.

It's an accident waiting to happen.

Getting trapped in the emotional cycle of investing can be very demoralizing and expensive. So I'm going to give you 5 tips to help avoid it altogether.

What is the Emotional Cycle of Investing?

I view this type of emotional investing as 6 different stages:

  1. You see amazing success stories or promising speculation tied to a specific investment opportunity
  2. You buy into the investment opportunity
  3. You may see some gains (Not guaranteed to reach this step)
  4. You don't sell in time to realize the gains
  5. You can't stomach the volatility so you sell your position
  6. Repeat

It's an all too common series of events that I and many others have gone through.

Instead of relying on logic and a well-thought-out plan, you are moved by the hype of the market to make a decision you're not truly comfortable with.

As painful as going through this can be, it's very easy to repeatedly make the same mistakes as you constantly chase big gains.

Let's walk through 5 strategies to help avoid those pitfalls.

1. Create a Recurring Investment Plan

Take time and define some investment goals for yourself.

Build recurring investments into your budget so you can accurately calculate how long it will take for you to achieve those goals.

Once you start contributing to your investments each month you can start calculating how long it will take to achieve your goals based on the average return on investment.

Having a plan that you're confident in and comfortable with can help ease your mind when it comes to investing.

You won't necessarily feel like you always need to risk your modest gains to chase the biggest return possible.

Instead of participating in the emotional investment cycle, you'll be chilling on the outside looking in.

2. Avoid Investing Social Groups

I would strongly recommend against joining Discord servers, Facebook groups, subreddits, or any other financial social group promising to tip you off on the next big stock.

Often these groups promise to give you signals and advice on which stocks to buy and sell. A lot of times screenshots of insane bank accounts and stock gains from members of the group will be circulated to convince you to join.

The problem is you never know who's running these groups and how much of the information you can trust.

A lot of times these groups can be self-validating echo chambers that refuse to see the flaws in their master plans.

Other times the organizers will prey on people's willingness to learn about trading by charging an absurd monthly fee to get access to "high quality" signals.

As I discussed in another article, no one can consistently predict how the market will move and anyone that suggests they can should be avoided like the plague.

A lot of these groups exist solely to capitalize on people's emotional reactions towards investing.

3. Define Strict Investment Rules

For myself, I found that it was really important to define a set of investing rules I wanted to stick to.

When you're investing based on emotion it's really easy to make flimsy justifications for why you're doing it.

I've been burned enough times to understand what works for me and what doesn't.

To combat those in the moment feelings I made a couple of simple rules (which I explain the reasoning for here) that I plan to always follow when investing.

  • Invest primarily in ETFs each month
  • Use excess savings to invest in one of two things:

    • A company with a product/service I use and want to support
    • Crypto (BTC or ETH)

These are rules that I'm comfortable with and that I believe will always align with my investment goals.

Yours may be different, but the point is that you have some guidelines to keep your decisions in check.

4. Simplify Your Investments

Let's take it back to some advice I learned in elementary school.


Keep. It. Simple. Stupid. (If you're reading this you're not stupid, that's just the what it stands for)

I've explained why I think stock picking is a waste of time for most people, so take a look at that article to understand my reasoning, but just know a simple three or two fund portfolio will never steer you wrong.

A lot of people try and chase too many stocks and end up killing their total portfolio gains in the process.

If you don't have time to do a ton of research, feel confident in every investment, and jump in and out of positions, simplify your investments.

Buying into 3 stocks each month may not sound very exciting, but it is a lot less emotionally taxing than managing 15 extremely volatile stocks.

While this won't grow your investments 10x in a month, it is a low-risk hands off way to see growth over several years.

5. Stop Looking at Investing as a Primary Source of Income

A lot of people see stocks as their ticket to early retirement, and they certainly can be, just not overnight.

Finding the next Amazon, Tesla, or Apple is like finding a single needle in 12 haystacks.

Understand that you're investing for the long-term payoff and avoid exposing yourself to unnecessary short-term volatility.

Trust me, you'll sleep like a baby seeing that your portfolio is up 15%-20% after consistently investing in it over the past several years.

Take a Step Back and Relax

A cat taking a cap nap

These suggestions were for people that continuously put their hands on the stove after being burned.

I've been there.

It's hard standing on the sidelines while it seems like you can be making free money.

Just take a moment and assess each opportunity rationally and avoid setting yourself back on your goals.

Do you get caught up in the emotions of investing? What do you do to combat it? Reach out to me and let me know!


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