How Emotions Control Your Investments

Emotions are at the forefront of every single decision we will make, whether we are aware of it or not. Emotions will always have an impact on the way that we behave and interact with the world around us, especially when it comes to decision-making revolving around investing.

Understanding how emotions can impact your performance will be the exact catalyst to you understanding how to control your behaviors under the influence of your emotions. Without further ado, let’s get straight to it. Welcome back! If you’re new to the channel, my name is Matt Jimenez. I’m an entrepreneur who has worked with the greatest minds in finance over the last several years, and I’m here to pour into you guys everything that they poured into me.

Can emotions impact success? In this video, I want to cover exactly how much our emotions will impact our decision-making in the world of investing. A lot of people think that they have detached themselves from their emotions, when in actuality it’s a facade and a persona that they’ve donned.

There are four primary responses to certain emotions that we have when it comes to investing, and I want to go over the top four that come to mind, primarily because these are the top four that actually have some data behind them. People will research for periods of time on their behaviors under certain circumstances with investing.

The first one I want to go over is loss aversion. If you’ve never heard this term before, it is the premise that people are far more sensitive to losses than they are to gains. You will notice if you have a multitude of investors, most of them will be far more emotional about the money that they lost rather than the amount of wins that they’ve had. They’re more likely to talk about how big their losses were or how they mismanaged something that went wrong for them. And it’s due to the fact of loss aversion behavior. People are always looking at the negative far more than they are the positive.

And what happens with this emotion is people are very driven by the fear of losing money, which leads them to make decisions that are completely irrational and illogical to what they are trying to do. This is the exact reason why you see traders hold on to losses that are way too big for their account size in terms of risk management. And they continuously hold it, hoping that the trade will eventually turn in their favor.

This is where the quote comes about “cutting your losses short and letting your winners run long.” It’s merely because of loss aversion behavior. People will always talk about their losses way more than they will their gains, and they will always make decisions based on how bad a loss is. Hence, they’ll hold on to a trade way longer than they have to because they want it to turn around.

And then on the flip side of this coin, this is why people snip their winners so soon, is because they want the gratification immediately. That is the whole mechanism as to cutting a trade when it’s profitable rather than letting it run and be far more profitable than it could have been.

The second thing I’d like to go over is the herding behavior. It’s no secret that humans actually naturally will always herd. This is why we have groups and conglomerates of many different movements and ideologies that really tend to cascade throughout society and make different subcategories of people, even though we’re all the same. But this is why people attach their identity to an ideology. It’s because we cannot help but herd.

Now, with that being said, have you ever been in a situation where you don’t really know much about an investment or a particular asset, but you see the herd of people endorsing this asset or investment, and you see all these people making money, and you eventually break and you end up putting money into this particular thing that people continuously talk about?

This is how herding behavior will impact your decision-making. I myself have fallen victim to this several times, and it is something that will slowly wear at you and your portfolio. Most of the time, by the time you’ve heard about something and everyone else was already involved, it’s far too late to get involved. In fact, this herding behavior is one of the exact reasons why bubbles actually form. We’ve all seen the chart, the psychology of a market.

Now, the herding mentality typically takes place in the belief section. People start to believe that it’s fully time to get invested, and then shortly after they get into the thrill area. This is where irrational and irresponsible spending and loans take place so they can buy more of a particular asset, which only blows the top off of this bubble, which always extends far too high. And then this is where all the euphoria kicks in, where people that are everyday Joe’s believe that they are the number one investors and they’re geniuses. This is the euphoria phase, and that is typically the area where the herding mentality tends to get into certain assets.

So with that being said, be very wary of when you hear about particular investments and/or assets and where they are in their development, how much adoption has actually happened around this asset, and on the fundamental side of things, how much is actually backing its valuation. That is the most important thing to know. So most of the time, these assets or investments don’t have much fundamental backing, meaning they don’t really have data supporting its valuation of being a trillion-dollar market cap, whatever it may be. The best thing you could do for yourself in this situation is look at the fundamentals of this asset everyone’s talking about and see if the value of this asset and its market cap is relative to the supporting fundamental data that is driving this asset. And then you can make a far better decision rather than defaulting to the herding mentality.

The next thing that could be detrimental to your portfolio in the future, moving forward, and you want to avoid is confirmation biases. These tend to develop in the investment world when someone has already made an investment and they do not want to have any opposing information that contradicts their ideology of having this asset go to astronomical heights that makes them rich overnight.

What they do is close out any opposing information and they only allow information that supports their thesis. While there’s many nuances to this, yes, it can be beneficial to try and support the asset you’re in as much as possible to make sure and validate you’re doing the correct thing. But it’s also equally important to allow opposing thoughts and opinions in because you want to look at things unbiasedly.

The moment biases get involved with your investments, so do losses because you tend to hold on to things far longer than you should have. I myself have felt victim to this as well. Back in 2017, I invested, I think, roughly around $7,000 into an altcoin, XRP, to be exact. And it went from 20 cents, roughly where I put most of the money in, and then like 22 cents, and it ran all the way up to $3. And during that time, I developed such a strong confirmation bias that anything that would impose on the ideology of this asset going to $100 or $10 in valuation, I completely blocked.

But if I allowed it in and understood that this is a market cycle, not a particular asset, and I’m not a genius because I bought it at a low price, I just got lucky at the timing of a bull market and bought anything. In fact, in 2017, you could probably put money on any altcoin and end up being profitable. This doesn’t mean you’re smart, nor does it mean you’re dumb, but what it does mean is that you got lucky with the amount of cash you had left and you decided to make a decision at the perfect timing.

Moral of the story, my holding went from $7,000 roughly in evaluation to over $130,000 in valuation. But guess what? My confirmation did not allow me to see that this was just a market cycle and we will slowly head back into a bear market because this is a clear bubble. I was completely distant to anything that would say that to me, and I only wanted to hear what I wanted to hear, basically sticking my head in the sand and only doing that with all the other people holding the same asset with me, because we didn’t want to hear anything that would threaten our dreams of becoming a multi-millionaire just by buying a simple altcoin.

Now, with that being said, you need to be aware of when you are not allowing new information in. If you could try to see your own life through a different POV, then you could slowly see how your behavior is. This is not easy to do, but it is definitely achievable, and this will allow you to analyze your behavior. Are you allowing new information in, or are you only allowing safe information that aligns with your beliefs? Because if you are only allowing the safe information in, chances are you’ve already developed a confirmation bias on whatever it is that you’re invested in. Always question yourself.

The last thing I’d like to touch on is emotional contagion. And I want to go over this because there are numerous studies showing that emotions are actually contagious. Now, with the understanding that emotions are contagious, you can easily draw the parallel of how that can influence market behaviors and market cycles. In fact, there are many investors that go solely based on market sentiment. And in layman’s terms, market sentiment just means the overall emotions of the market, whether they’re positive or negative or neutral.

Now, with those four emotional behaviors that may take place in your life or may never take place in your life, it is super important that you keep your mind open. There’s a quote that I love, and it goes something like this: “I’d rather have my mind open to wonder rather than closed by belief.” And when it comes to investing, it is super important that you stay open and receptive to new information so you could always be at the forefront of making the best decisions for your portfolio.

Now, the beauty of all of this, if you’ve made it this far, I have a solution that actually eliminates all of the emotions from making decisions in your portfolio. And that is utilizing software to trade for you. In fact, it does all the placing and closing of positions for you so you don’t have to worry about loss aversion kicking in, holding on to losses way too long, and cutting winners way too short. All of this is eradicated through the software. And if you’re interested in potentially utilizing this software in your portfolio, hit the link down below, and I’ll see you on the next one.

Peace.

Please visit How Emotions Control Your Investments to watch the full video on YouTube!

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