Investing is one of the best routes to secure a comfortable retirement.
However, as with any journey, the road can often be bumpy.
Stock markets fluctuate regularly and can remain volatile for long periods.
Even great companies do not move up in a straight line, as they may periodically suffer from bouts of weak demand.
The COVID-19 pandemic has led to a sharp economic contraction and a punishing bear market.
Staying the course is important if you want your wealth to compound over time.
Being human, you will inevitably go through an entire gamut of emotions as you put your money to work.
It’s perfectly normal to feel emotional when it comes to your hard-earned money.
Warren Buffett once said: “The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable.”
However, you need to be on guard for three emotions that may trip you up as you embark on your wealth-building journey.
Fear and panic
Two of the most dangerous emotions in investing are fear and greed.
The problem is you don’t know when these may manifest as events can be unpredictable.
Fear causes you to feel overly worried about your investment portfolio.
And when a sudden, unexpected negative event occurs, it is also fear that will cause you to sell your investments in a panic.
This move will set you back severely in your wealth accumulation journey as you will lock in losses when share prices plunge.
By giving in to your fear instinct, you would have turned your unrealised losses into real losses.
Rather than panicking, the right thing to do would be to calmly assess the situation.
By using a logical and objective thought process, you can then properly evaluate the reason for the plunge and decide on the best course of action.
A falling share price may not always be a signal to sell.
One-off, temporary events do affect companies now and then.
Such events may not permanently alter the investment thesis for the company.
Selling when such news hits may end up being a mistake. If you have spare funds to deploy, it may even be a good idea to buy more when there is undue short-term pessimism.
Rein in your greed
Greed is the exact opposite of fear and can drive people to make silly investment decisions.
As stock markets recover swiftly following the virus outbreak, there have been many reported cases of greed.
These cases have been termed “fear of missing out” or FOMO, as the NASDAQ index in the US continues to achieve new all-time highs.
The exuberance has lured amateur investors into the stock market.
Along with new trading apps such as Robinhood that tout zero commissions, many have ended up losing significant chunks of money.
A word of caution is thus warranted – it’s wise to temper your greed and only commit a small portion of your capital to speculative companies.
It may feel tough seeing your friend or neighbour get rich quickly, but do remember not to risk your capital unnecessarily.
Doing so may set you back several months, or even years when it comes to achieving your retirement goals.
Regret is a useless emotion
The third emotion that may hold you back from a sweet retirement is that of regret.
Marlon Brando, the famous Hollywood actor, was once quoted as saying: “Regret is useless in life. It’s in the past. All we have is now.”
He was spot on with regards to regret being a useless emotion.
Too many investors dwell on their past mistakes, leading them to worry about committing capital to the stock market.
This regret acts as an anchor that stops you from meaningfully putting capital to work.
Inaction means you will end up leaving your cash sitting around in a bank account.
As banks are paying out a pathetically low interest rate, your spending power will almost surely shrink over time due to inflation.
So, get over your regret and look to the future. It’s within your control to make it bright and cheerful.
Get Smart: Strive to be a wiser investor
The above are psychological stumbling blocks that we, as investors, should be wary of.
No matter how great you are at financial or business analysis, emotions that go haywire can always end up tripping you up badly.
Here at The Smart Investor, we should all strive to be wiser investors.
This involves understanding your psychology and gaining control over emotions that could wreak havoc on your retirement plans.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.