An Emotional Rollercoaster
One of the biggest detractors from wealth is emotions. Emotions have a large influence your financial decisions. You could be buying a home or holding a stock that is falling. It is important when you are creating wealth to try and separate emotional and financial rationale.
Russell Investment Group has released an emotional rollercoaster that shows the different emotions an investor experiences through various investment cycles.
When you first enter the market you enter with optimism and as your investment increases you become excited. The risk in this area is that investors get carried away and continue to put all of the profits back into the market, effectively doubling up. This was evident before the GFC when everyone was investing, regardless of whether they understood what they were investing in.
Then the market starts to turn and investors become anxious. This turns to denial or the investor is thinking ‘It will recover’. Unfortunately for investors this then turns into panic and this is when investors make bad decisions and sell. Once again we witnessed this in the GFC when the market was falling 10 to 20% a month. It is at this stage that it is best for investors to invest.
When the market starts to recover we begin to recover hope. We are currently in this stage in the equities investment cycle.
Unfortunately it is very hard to pick the exact part of the emotional cycle we are in but by being aware of your emotions it will help you make better financial decisions.