Emotions make up a big part of our everyday lives. Emotion governs most of our thought processes and decisions, whether it is in our personal lives or at work. As much as we are able to have a purely logical thought process, our emotions play a key role in almost every decision we make.
We assume that when it comes to finances that our emotions would start to play a smaller role in how we manage, save, invest and spend our money – but does it really? Research has shown that emotions have an impact on investment decisions as investing is very personal and thus emotional. When planning for your financial future for your business or your family an emotional connection is inevitable.
Emotional decisions are inevitable
During the highs and lows of the market, it becomes increasingly difficult to eliminate emotions from the investment decision-making process. Research indicates that a typical investor’s reaction to different market cycles has a dramatic impact on what they do next. For example, at the initial investing stage, most investors are cautious and hopeful. The higher the share price climbs, the more confident and positive they become and at a really high peak, most investors are in a state of euphoria. Likewise, the exact opposite happens when stock prices start to fall. Investors move from the euphoric state to confusion, worry and ultimately panic.
The volatility of the market can, overtime, take a toll on investors’ emotions, but understanding common reactions to market ebbs and flows can certainly help maintain perspective in uncertain markets. Extremely low share prices easily cause panic amongst investors and the urge to dump or sell shares for fear of losing even more money is the most common reaction.
However, with an investment philosophy that focuses on buying long-term shares in stable, global brands, market lows are not necessarily viewed in a negative light. Warren Buffet and Charlie Munger, two of the most successful equity investors in history, see fluctuations in share prices as an expected element of the investing landscape.
Focus on an investment strategy
Allowing emotions to dictate investment behaviour, could prove to be a very costly exercise. The key is to not panic and focus on media dramatisation. Rather go back to the initial investment plan, have a conversation with the fund manager, and if possible, buy more stock! As Warren Buffet advises;
Share price vs intrinsic value
Feeling anxious and nervous is absolutely normal, the most important thing to remember is that, just because the share price has dropped, it doesn’t change the intrinsic value of the shares. For example, a share price drop in McDonald’s does not mean that consumers will stop buying happy meals. A drop in share price may not mean that the company is in trouble, it may be a result of other factors. Buying shares in a good company that has a strong potential for growth on a global scale is a good investment even when the share price is lower than expected.
Investing without emotion is easier said than done, but with the help of a knowledgeable and understanding fund manager, you will be well equipped to stay strong during market declines and reap the long-term benefits later on. For more information about investing in global brands contact one of our fund managers.