How Investors Lose Out To Emotion [Infographic]

For this week’s infographic we cover How Investors Lose Out To Emotion. It’s a dangerous thing. Without education and setting parameters and limits, emotions can flood even the wisest investor. As we’ve always said on All Things Finance the key is to remove as much of the emotional component as you can (setting limits, stops, etc). But let’s take a look at how investors are losing to emotional investing.

Euphoria leads to Confidence: A buyer jumps in and feels emotionally confident they’re going to experience a win.
Denial leads to Fear: If a stock price drops, investors lose out to emotion when they double-down and increase their position at a “bargain price.”
Panic leads to Capitulation: The investor has already held on too long and the agony becomes so great they may finally jump out at rock bottom.
Agony and Depression lead to Disinterest: The once euphoric investor has now been hurt by the experience badly enough they may not want to give it another shot.

Giving up or giving in is the worst way an investor can lose out to emotion. We’ve all made investment mistakes–we would be wise to write them down and learn from them.

Here’s the best way to learn, respond to, and protect from emotional investing:
  1. Begin with a small amount
  2. Have realistic expectations
  3. Learn from failures
  4. Invest in what you know
  5. Try to not let emotions drive you

Don’t be discouraged if you’ve lost out to emotion while investing in the past. Learn from it! Be confident that you won’t make the same mistake again, and start out with a small amount if you’re jumping into new territory.

Readers: Have you ever made an emotional investing mistake? If so, what can we all learn from it?

investors lose out to emotion

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Comments

  1. Very nice post Todd. Sticking to the basics is an indispensable list to follow. Your infographics were terrific but hard for an older guy like me to see. Anyway thanks for the tips especially after yesterday’s historic high by the Dow.

    • Thanks for the feedback Steven! Even I have to zoom in big time to read some of these infographics. What would you suggest to improve? Maybe give a more thorough synopsis?

  2. Emotions really can lead you astray. I had a few bad experiences with that myself. What triggered the start was a few emotion-led awesome trades that got me on the wrong foot. Like Warren Buffet said, “…try to be fearful when others are greedy and greedy only when others are fearful.”

    • That’s interesting, I had the same exact experience. My first 5 trades ever were huge gains. Then the Greece and Italy fears sunk into the market and I lost a lot of value. I was new, and didn’t know what to do. “Paralysis” is a good term to use as to my response.

  3. Well said Todd! Warren Buffett sums it up nicely, “For investors as a whole, returns decrease as motion increases.”

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