3 Ways to Control Our Emotions When Investing

Most investors know that making investment decisions based on emotions will lead to mistakes. Even Warren Buffett said that it is not temperament but emotion that is the most important in investing.

Despite knowing this, many investors still make bad decisions based on emotions. This is because emotions inevitably creep up on any investor.

Blackrock Asset Management reported that individual investors usually underperform the market due to emotional investing. This can be in the form of greed, fear or even anger at making losses, leading to investors making rash decisions to overturn losses.

With this in mind, I thought it might be good to describe three ways to control our emotions when investing.

Gain knowledge

Research has shown that the more knowledgeable the investor is, the less likely they are to make mistakes based on emotions. Being aware of all the possible pitfalls of investing and being self-aware of your common emotional mistakes can help an investor avoid making bad decisions based on emotions.

Once you have gained sufficient knowledge, you will also start to appreciate data over emotions and to gain better control of your decisions.

Set a plan and stick to it

One of the methods that we can use to avoid emotions during our investment process is to simply stick to a plan regardless of the volatility of the market. This can be in the form of using a dollar cost averaging strategy or setting aside a fixed amount of money every month to invest with.

By having a plan and sticking to it, we can avoid emotional mistakes like fear and greed taking control of our decisions.

Write down your reasoning

Recently, my Foolish colleague, Chin Hui Leong, wrote an article about how a simple notebook can help all investors invest better. By writing down our reasons behind every investment decision we make, we can easily identify mistakes that we had made previously and avoid them in the future.

It also helps us to avoid making emotional investment mistakes by preventing us from making rash decisions. By writing, we will also be able to better identify when we are investing irrationally because of emotions.

The Foolish bottom line

Human emotion is part and parcel of investing but has been the culprit of the poor performance of retail investors. Acknowledging that we are prone to making these mistakes is the first step to improving. Hopefully, these three easy steps can also help us all avoid making emotional mistakes in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.