MENU

How Can You Become A More Rational Investor?

Our emotions can wreak havoc on our investment returns. Warren Buffett once commented that having the right temperament is a lot more important than having great intelligence when it comes to being a good investor.

Unfortunately, it’s not easy to remain emotionless when investing our own savings – emotions are after all, what makes us human. Fortunately, there are ways for us to trick our minds into being a more logical thinking-tool when it comes to investing.

Here are some of my personal techniques.

Segregation  

One of the best ways I have to maintain objectivity in my investing activities is to segregate. In other words, I view my investment portfolio as a separate entity from the cash I have for daily living.  I find that doing so makes me less emotional when the value of my portfolio fluctuates.

To achieve that, I had set up separate bank accounts that were either solely for daily-living/savings purposes or solely for investing purposes. With this set-up, I was able to mentally map the latter as my long-term investment account, which is separate from my other ‘regular’ bank account which I will access far more frequently.

Measurement

Another trick that I use is to always measure my investment performance for my portfolio in terms of its net asset value (NAV).

In doing so, I treat my entire investment portfolio as a “mutual fund” whereby I’m the manager. Each time I add or withdraw cash from my fund, I view it as an additional investment or redemption of the fund. Each transaction will occur at a particular NAV – this is very similar to how you would buy or sell a share in the stock market.

The calculation of a NAV for my portfolio detaches me from “seeing” how much I have earned or lost in actual dollar terms – and this helps in giving me emotional calm.

Punching in the numbers for your portfolio’s NAV would require some brain sweat – there’s no running from that. But, I think it’d allow you to make investing decisions more logically as less emotions will be involved.

Here’s a detailed guide for how you can calculate your portfolio’s NAV.

Stop checking your portfolio

The last of my personal tactics that I’m going to share is for you to simply do nothing.

This means that we should refrain ourselves from checking our account every 5 minutes or so. It also means that we should stop worrying constantly about the daily movements of our investment portfolio.

If we have constructed our investment portfolios with a long term view, there is really no need for us to check its performance daily, or weekly, or even monthly.

Doing nothing has prevented me from panicking when my investments have fallen in price or from selling out too early when prices are rising.

Foolish Summary

While what I’ve shared above may not be applicable for everyone, they have served me well for many years and have helped me in becoming a more logical investor.

All told, it is very important for each of us to come up with a system that suits us individually and that can help prevent us from becoming too emotional about our investments.

The Motley Fool's purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock -- Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock -- Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.