Emotion Management is Essential to Money Management

If what you are doing isn’t working STOP it! That sounds so logical and simple, but we all know there are things/events in our lives where we just keep repeating what isn’t working and feel as though we can’t stop. The cycle of emotions are generally at the root of the cause as a result we allow emotions to control the process or cycle of events in our lives and thus we feel we are not in control of the outcome. In order to change we need to learn or educate ourselves to act or perform differently. The learning process however also involves emotions. Thus, the process of learning instills the emotions we have towards a specific event, relationship or task. If we apply this to investing we all have emotions relative to money that are stirred up and applied, right or wrong.

Let’s look at something we can all generally relate to, learning how to ride a bike. When approached with this endeavor we are given training wheels to ease the process of balancing a bike without falling over. In reality the training wheels become more of a crutch and can act to increase fear, than an aide for learning how to ride and balance a bicycle with just two wheels. If we remember the process of a parent teaching us and telling us we can do IT! I remember my dad with one hand on the seat, the other on the handle bars saying peddle faster as he ran along side. First he would let go of the handle bars and hold the seat, then attempt let go of the seat and tell me RIDE, RIDE, you’re doing good! Of course we all know what happened next… fear set in, the stirring began to wobble and I fell over. Of course my dad ran over, picked me up and dusted me off, all the time telling me how great I did. Now stop and think about this… I just fell, my greatest fear, and he is telling me I did great? Of course the next sales pitch is for me to get back on the bicycle and do it again. RIGHT, I am getting back on that bike after I just fell over… REALLY?

We all know the outcome, over time I learned to overcome my fear and learned to ride a bike. So well in fact, I could do so with no hands, chewing gum, laughing and going faster than I should. Learning overcomes emotions/fear and habits are developed to continue and repeat the process over and over again successfully. That doesn’t mean we can’t still fall during times when we lose our focus or danger appears that we didn’t expect. Thus, the learning process never really ends we just become better at it because the basic habits are already in place. And if we do fall, we know how to get up and start over again.

Taking the same process and applying it to investing or trading is very similar to riding a bike. We can start with training wheels or paper trading, or we can find a teacher/coach to help us learn how to hold the handle bars (enter positions), peddle (sell positions) and turn (manage the process successfully) all at the same time, and as we apply what we know we develop sound habits for managing money and not falling (talking big losses). As we practice the process we continue to learn more and become better at what we do every day. We will still make mistake by losing our focus and concentration or events that are unforeseen, but we also know what it takes to dust ourselves off and start the process again. We learn by keeping it simple, practicing the basics and then layering in the complexity as we go, never forgetting to Keep It So Simple (KISS) we can always implement our plan.

Below is a graphic of the emotional cycle relative to investing. It shows the process we go through as investors when we put our money at risk in the stock market. Thus, the term emotional roller coaster. The ups and downs we experience emotionally never seem to change relative to the market cycles. However, we can learn to manage the emotions with a clear understanding of the process. We also learn to deal with the emotions by eliminating false assumptions through education. We have seen plenty written concerning buy and hold investing. The process made popular during the 80′s and 90′s made the assumption that corrections were temporary and by holding through these correction periods the markets would bounce back in time. However, since 2000 the S&P 500 index lost money over the next ten years. Thus, the rebirth of emotions relative to holding investments over the long term. As stated above, education plays an important role in the process. Ask yourself this question on a regular basis, ”If what I always thought to be true wasn’t, when would I want to know about it?’ Continuing education is key to learning how to deal with your emotions relative to the strategy you implement for investing your money. The more risk you subject yourself and your money to, the more emotions you will experience and combat on a regular basis. Choose a strategy that is compatible with your emotional well being. Managing your emotions through the ride of the ups and downs is key to being successful in the process of investing money. Developing habits that fit you is the key to successful habit building for investing.

market_emotions

Fear, hope and greed are the three most common emotions investors deal with. Understanding when they are most likely to attack is the key to dealing with them. The chart shows fear is most common as the market moves lower and it escalates as the market drops. You can deal with fear by setting stops and establishing a worst case scenario for your money. Greed is most common because the higher the market goes it fosters the belief we will become wealthy overnight. This can be dealt with in the same manner by laddering or trailing your stops to permit your profits to run. But, they will take you out of a position should the market turn lower, thus escaping the greed of holding in hopes it will move higher again. This is all part of the process of building and implementing a strategy that fits your personality and accomplishes your goals as an investor. I am not saying it will ever be easy to eliminate emotions relative to the investment process, but we can learn habits that will manage our emotions and allow us to take the right actions in accordance with our specific strategy and goal.

I have taught a workshop/webinar, “Taking the Fear Out of Investing” for more than 20 years and the principles still apply today. The fear factor will step in when you least expect it if you don’t understand the emotion. To quote Edmund Burke, “No passion so effectively robs the mind of all its power of acting and reasoning as fear.” When your money is at risk, fear becomes the greatest enemy to the process of investing. This is where sound habits and planning become vital and takes over versus emotions. When you have a strategy backed by sound money management habits for investing, you set a predefined entry point, a predefined exit point and a predefined target. You have strategy for making adjustments as you go forward. Why? For exactly the reason of managing the emotions to ride roller coaster of the markets and know you are always in control of the process.

This is called a proactive approach to managing your money versus reactive. When the markets move higher you can deal with the, “I am going to maximize my gains” emotions or greed. When the market is moving lower you can deal with the, “it will bounce I’ll hold until I break even” emotion or fear of loss. The process of managing your emotions is an integral part of money management. Take the time to learn how to manage both and you will be successful at the process of managing your money. After all, It Is YOUR Money… Manage IT!

Make sure you register to attend my webinar version of “Taking Fear Out of Investing” coming up on November 3rd.  REGISTER HERE!