The previous post got me to thinking about the importance of limiting the affect emotions have on decisions involving money.  This is especially true when it comes to investing.  It can be very dangerous when you allow emotions to get in the way of making sound factual based decisions.  This relationship between money and emotions is extremely complex and varies widely between different people.  I am not a psychologist so I’m not going to analyze this.  Instead let’s accept that this is a possible downfall of investors and identify ways to deal with the problem.  I’ve identified three great habits that can help you keep a level head when it comes to investing.  I’m using investing as a generic term to mean anything from stocks, to real estate, to starting a company etc.

1.     Have a plan or strategy. Having a good plan before entering an investment is essential to keep from getting emotionally involved in the decision making.  Either the investment opportunity meets the criteria you outlined or it doesn’t.

2.    Have an exit plan. Before entering any investment know how you will exit it.  Both in the case of a gain and a loss.  Many investors get emotionally attached to investments and end up keeping losing investments when they should just take their loss and exit before they lose more.  Instead they hold out for a reversal that never happens.  The biggest benefit of this is that you identify your potential loss up front.  This allows you to mentally deal with it ahead of time and better understand the risk.

3.    Take a break. When you start to feel like you are losing control and no longer looking at investments objectively you need to step back and remove yourself for a little while.  This often comes after suffering a string of losses.  Often times people start making erratic panic based decisions that just cause them to lose even more money.  At this point stop!  Take a break and once you are in control again review your strategy and identify the reasons it was not working.  Then fix these problems and try again.

Finally, if this doesn’t work just remember don’t worry it is only money.

-T!

I just want to add one important point. Whatever your emotions are you have to follow your plan. Another problem that could arise is how good your plan is. When the current situation of the market is significantly different from what it was when the plan was first made you have to be ready to make changes to your plan. Therefore, your investment plan has to have preset limits of effective operation. As soon as the situation changes dramatically and the plan goes off limits changes need to be made. Of course all changes have to be done without excessive emotions.

-O.