We have all heard the saying, “buy low, sell high.” It is common advice regarding investing and trading. We need help following this advice because of a hidden problem, our emotions. How can you limit emotional involvement when making investment decisions? This blog discusses the emotions involved and how planning can help you financially.
The hidden problem is emotions.
In times of recession, depression, or turmoil, it can be difficult to buy low because the market sentiment is bad. Fear of losing money can interfere with our judgment and prevent you from taking action. To buy low when things are going bad, we need to be aware of these emotions and stay objective. In times of bull markets, all-time highs, or growth, it can be difficult to sell high because market sentiment is good. The greed of wanting to make even more money can set in, and this can prevent you from taking profits and selling your holdings. You should acknowledge these emotions, but they should not dominate your investment decisions. No one wants to lose all their money on an investment, and everyone wants to make money on their investments. The key is not letting our emotions drive our actions or inaction.
The solution is strategy and planning.
Buying low. Is it time to buy, or is this investment a loser? Selling high. Is it time to sell, or will it go up more? These are thought-provoking questions. Exit strategies are contingent plans by an investor on when to sell an investment when it has met or exceeded predetermined criteria. For example, you buy a stock at $20 a share, you want to sell it when it gets to $40, and you want to sell it and look for a different investment. That is an exit strategy. A sunk cost is a cost (loss) that occurs that has already been incurred and cannot be recovered. Remember the phrase “abandon sunk cost.” For example, if you buy a cryptocurrency priced at $20 a coin, which goes to $10 a coin, you decide beforehand that if the coin lost half its value, you would sell it at a loss. That is abandoning sunk cost. It is important to remember that long-term planning outperforms short-term market fluctuations. View wealth creation over long periods, like decades and generations. Viewing wealth creation this way can strengthen your planning and strategy.