3 Ways Emotional Intelligence Can Prevent Emotional Investing
It’s only week ten of 2021 and it’s already been a heck of a year for the stock market. You probably saw the news stories about the Reddit stock market “takeover” that happened when a bunch of ordinary investors bought up stock of failing companies and got a massive payout for it. Maybe those got-rich-quick stories inspired you to open your own investment portfolio and try your hand at investing or day trading.
That’s great. I love hearing that women are moving outside of their comfort zone and taking control of their financial freedom. But that said, investing is also emotional, especially for new investors.
Practiced investors approach individual stock investing like buying new skin care products. They don't just splurge on the first $80 Sephora skin care product they find. Instead, they do research, comparison shop, look for reviews, and carefully evaluate if that product is right for them. Similarly, when choosing a stock they research good companies and gather data which helps determine if a company will be profitable in the future. They use a rational decision-making process to find investments that will hopefully reward them ten-fold in the future.
New investors on the other hand generally invest in stocks based on emotion and reactive decision making. They often buy hot stocks because FOMO, when prices are already high, and the stock is overvalued. And they often sell because of panic, fear, and uncertainty. If the stock market has learned anything from the GameStop-AMC-Robinhood-Reddit debacle, it’s that jumping into the latest trending stock and treating the stock market like a lottery ticket likely isn’t going to rake in the dough. This is why the average new investor underperforms the average annual S&P 500 stock market return of 10% and has returns of about 5%.
In order to keep yourself sane and level-headed when making important investment decisions, you need to develop a little something called emotional intelligence. It’s one of the most – if not the absolute most – important tool in an investor’s toolbox.
What exactly is emotional intelligence and where can you get some?
According to Help Guide, emotional intelligence or EQ, is “the ability to understand, use, and manage your own emotions.” While a high IQ is what one might think would be most useful for analyzing the stock market and creating a foolproof investment strategy, investors should really strive for a high EQ. Developing your EQ is one of the most effective ways to steer clear of some of the biggest mistakes that new and first-time investors make.
Here’s what EQ can help you with:
1. No more impulse buying
We’ve all done it. Splurged a bit too much on food, a new haircut, a cute pair of shoes when we got stressed, upset, or super excited. Sometimes a little pampering and retail therapy is just what we need to lift our mood. But sometimes our reckless purchases can do the exact opposite and plunge us further down that “why am I even allowed to own a credit card” hole.
Mood swings are a recipe for disaster in the stock market. When we buy on a whim, because we’re worried our portfolio is getting thin or because we’re high off of an investment that has gone all kinds of right, we often make unwise purchases that won’t help us to be smart and savvy investors.
That’s why EQ is absolutely essential. When we know how to practice self-control and regulate our emotions, it’s easier to prevent that impulse buying. If you can divert your sorrows into a pint of ice cream or a walk with your furry companion and away from the highly volatile stock market, you’ll be able to maintain a more profitable and consistent presence on the stock market that doesn’t change with your moods.
2. Step off the free market roller-coaster
In the stock market, change is inevitable. Every day, more companies go bankrupt, new businesses join NASDAQ, and a single stock price can change a dozen times. If the free market was a reality show it would be the most infuriating, edge-of-your-seat drama that ever hit the airwaves. The stock market is the definition of an unrelenting emotional rollercoaster, and not the fun ones you can ride over and over again. It’s more like the panic-inducing ones that go so fast they make you black out.
Riding that stock market Super Coaster can be an emotionally draining experience for a new investor. One day you might be on the top of the world, watching your portfolio soar as your well-researched investments rake in the cash. Then the next day you could be blubbering on the kitchen floor because your portfolio took a big, unexpected hit. If you stay on the stock market roller coaster, you’ll drive yourself – and your family and friends – insane as your mood changes with each uptick or downtick in stock prices. There’s only one way to end the cycle: get off the roller coaster.
The best way to free yourself from the insanity is to develop some hardcore emotional intelligence. Teaching yourself not to panic when you see those little red arrows or buy a ticket to Cabo whenever you’re in the green, is far more valuable than any stock you can buy. If you can remain calm in any circumstance and keep your emotions from running wild at the first sign of trouble, you’ll be able to free yourself from the Super Coaster and keep living your awesome life without all that anxiety and fear. Now that’s what I’m talking about.
Click here to pin this:
3. Get out of your own head!
Everyone has had a different experience with money. Maybe you grew up in a house where hoarding pennies and dimes was the only way to pay for groceries, or your parents kept you so out of the money loop that finally getting your own debit card almost gave you a heart attack. Our experiences with money, wealth, or the lack thereof, tend to stick with us. If your parents hoarded pocket change, you probably still have a mason jar on your counter that you put loose change into, not out of necessity but more out of habit. If your parents never openly spoke about money, you still might not be super comfortable talking to a spouse or significant other about finances, personal or shared.
Money is obviously very tied to our psychology, upbringing, and mindset. Our personal view of money can either be our greatest strength in the free market, or our ultimate undoing. Trading according to that habitual money mindset – in a very cautious way or maybe even with wild disregard for any financial consequences – can spell trouble for your success on the stock market. Those who allow their past money experiences to define their trading strategy risk losing a lot when another strategy or approach would be better suited for the situation.
That’s where EQ comes in. When you can sit back and recognize your own financial mindset – good or bad – you can be a much smarter investor because you can learn to rationally consider situations and whether or not your money mindset will help or hinder you. You can be a dynamic investor who can change strategies and trade in different ways to accommodate trends in the market or your own personal situation, rather than being boxed into your limited money mindset.
Although emotional intelligence may be a foreign concept to some, we’re all in luck because – unlike an IQ number which we are all born with – EQ can be developed over time with self-reflection and practice. So, if you don’t have a very high EQ now, don’t worry! You have tons of time to start getting in touch with your emotions and learn some self-control strategies to get that EQ soaring.
As a seasoned investor and someone who worked in finance for what feels like forever, this is my best advice for first-time or beginning investors: take some time to develop your EQ so you can get those emotions in check and create a better headspace for investing. Your portfolio will thank you.
Sources:
Improving Emotional Intelligence -- Help Guide
How Emotional Intelligence Can Increase Your Profitability as an Investor -- The Money Mini Blog
For Investors Emotional Intelligence is as Important as IQ -- U.S. News and World Report
