When I speak with a lot of young adults, the good news is that a lot of them express a strong interest and desire to learn more about investing. As many of these adults are just starting out at work after graduating from university, their income-generating abilities remain limited, but it’s always a good idea to start off with knowledge first anyway, and then deploy money later, once they have saved up a sufficient sum.
Every investor should start small first and slowly but steadily build up a portfolio of great companies. What many do not realise, though, is that the emotional aspect of investing tends to have a far greater impact on one’s investing ability and results than one would care to admit. This is why it’s so important for new investors to be able to manage their emotions well first before they dive into the turbulent world of investing.
Which emotions to manage?
The dominant emotions to deal with in investing are essentially greed and fear. Since investing involves money, investors are often caught up in a maelstrom of emotions as money is either made or lost — sometimes quite quickly. Greed involves chasing after glamour stocks that may hold great promise but end up under-delivering, while fear can make investors sell out in panic after witnessing a sharp decline in the share price of a company they own, even if the underlying business remains intact.
Why is the management of emotions so important?
Aside from just greed and fear, there are many other psychological biases and fallacies that can affect our investing performance. It’s imperative that we get a handle on these emotions as they may trip us up time and again when we invest. Note that the idea here is not to suppress our emotions (as this is probably not humanly possible anyway), but to gain clear insights and an understanding as to why we think the way we do, and whether parts of that logic may be flawed.
The right psychology and mindset
By cultivating an appropriate mindset for investing, we as investors can greatly improve our investment performance, allowing us to grow our initial capital into a sizeable sum of money.
The Foolish bottom line
Managing money is not an easy undertaking, and it can be extremely stressful. It is therefore important for investors to manage their emotions well first before attempting to manage their own money. Without the proper psychological resilience to handle greed and fear, investors may succumb to their emotions and end up losing a large chunk of their valuable capital.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.