The Motley Fool

Why Excitement Could Be Bad For Your Portfolio’s Performance

In my many years of investing, I’ve often observed that people tend to get a little too excited over investing. This is especially so when there is a burst of good news announced, or if the share price of some small, obscure company suddenly shoots up by 10% in a day. Investors who have sunk money into such companies would pump their fist in the air as though they had won a lottery. Obviously, we are all entitled to some elation and joy when our investments do well, but the problem arises when investors actively seek out excitement as a normal part of investing. Let me explain this in a little more detail on why this behaviour could be bad for your portfolio.

Proper Attitude For Investment

Investing should be treated as a serious activity where effort and study are required to make prudent financial decisions. As with any serious financial decisions, these should be made with a calm and rational mind, unperturbed by bursts of activity which may over-stimulate one’s mind. Excitement is good for entertainment and also for fun and enjoyment, but it would interfere with one’s thought process when it comes to investment ideas.

Excitement May Imply Higher Valuations

Excitement is usually associated with pumped-up valuations, because when people get excited, they tend to pile into the shares of a company without thinking about the implications, valuations or margin of safety. This results in high valuations even for well-run, stable companies, which means that the potential for decent returns diminishes greatly for an investor.

Hence, excitement may be good for news headlines, but it certainly would not be good for an investor if he were to jump on the bandwagon and join in because of social pressure. He would be doing himself a disservice by purchasing shares when there is a lot of optimism priced in.

Excitement May Affect Your Psychology

Not to forget that excitement also results in an adrenaline rush to your brain, which may impair logical thinking and cause one to make rash, undisciplined decisions.

When a company gets hyped up, rational investors usually throw caution to the wind and pile into the same idea, with the hope of striking it rich with a lottery-like mentality. This is exactly the kind of thought process which ends up destroying the wealth of many investors, and is therefore greatly discouraged.

The Foolish Bottom Line

Excitement is, in a nutshell, bad for one’s portfolio performance if one ends up buying all the hyped up companies with astronomical valuations. Such an action may cause one’s portfolio to lack a margin of safety and be primed for a steep fall should an adverse event occur.

Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.