Emotionally investing in a sexy stock could cost you serious $$$
TORONTO, June 21, 2017 /CNW/ - Why are some investors easily compelled to buy a sexy stock based on headlines and hype, while others take a more measured and dispassionate approach to long-term investments? Investment advisor and consumer advocate Adam Hennick of Hennick Wealth Management surveyed Canadians on their investing habits, then teamed with Dr. Yashar Khosroshahi, ND and Brain-Based Executive Coach for strategies to avoid emotional investing.
The national investor survey revealed a number of key findings:
1) (Don't) listen to your gut
- 69.2% of men with a high income ($100K - $149K) regretted making an investment decision based on emotion or a gut instinct.
Dr. Khosroshahi suggests that if you are having a 'gut' or physical reaction to the thought of putting money into an exciting investment, it may not be your 'gut' telling you to go for it as much as your body trying to stop you. "When you really break it down, sweaty palms, hair standing up on the back of your neck and a tingling in your belly might be the same reaction that you have to an unexpected letter from the taxman."
2) Choose your friends wisely … Particularly if they are men!
- Almost twice as many men (13.7%) bought stocks based on a hunch or gut feeling than women (7.5%) across Canada.
- Significantly more men (34.2%) would buy a stock based on the recommendation of a friend (dependent on how knowledgeable they are) compared with women (27.8%).
"Men seem particularly influenced by 'insider advice' from other males when investing. I hear a lot of 'Warren from the baseball team says it's a sure thing because he knows a guy' sort of reasoning, but it never seems to be based on fact or research. Women just don't think that way about investments – which is wise," said Adam Hennick.
Dr. Khosroshahi suggests if you have friends who like to live on the edge and make seemingly risky investment choices, they could have a profound influence on how you make decisions. The desire to keep up with your friends is human nature. So if a friend is recommending an investment, be sure to do your own independent research before jumping on board. We all want to feel like we are part of the group, and these feelings can extend to financial and social decisions.
3) More money, more (potential) problems
Higher Income creates a higher likelihood of buying stocks based on emotion … or on a recommendation from a friend:
- Yearly income significantly affected if respondents were likely to take a stock recommendation from a friend. 11.8% of high income earners ($75K - $150K+) said they would buy a stock based on a friend's recommendation, compared with just 5.3% of low-to-mid income earners ($0K - $74K)
"If you do take investment advice for a friend, try to do it from your friends that have been successful in investing. This seems obvious, but sometimes our desire to act on a hot tip can overwhelm our logic. Ask yourself, is this a person who's actually done financially well in investing, or someone who just talks a good game," added Hennick.
4) With age comes investing wisdom … maybe:
- An overwhelming 75% of respondents aged 55-65+ said they have not and would never buy a stock based on a 'hunch' without doing research first.
- 48.8% of those polled aged 55-65+ said their emotions did not play a part in their investment decisions.
- In contrast, 32.6% of respondents aged 18-34 said their emotions affects their investment decisions 'fairly often' or 'frequently'.
Damn … I'm an emotional investor –now what?
"You likely already know if you are an emotional investor based on how you handle other key stress points in your life," adds Dr. Khosroshahi. "The good news is that you can learn to be mindful of when you might make an emotional investment decision and mitigate bad decisions by building your own road blocks."
a) Conspire to complicate
As a safety valve, Dr. Khosroshahi suggests that you train your brain to ask more questions before investing and give yourself a two hour cool off period before pulling the trigger. Hennick suggests making your own checklist of key questions before committing. "Maybe stock x is cool and they make something that you really like, but how has the stock performed? How has it performed over the past 5 years? Is it really worth buying into at the current price? What are the risks?" says Hennick.
b) 'Write' on
As an ultimate way to eliminate emotional investments, Dr. Khosroshahi strongly recommends forcing yourself to write a 500 word email or essay on why a stock makes sense and why you have to invest now. If you can make a convincing case and examine all the factors in a way that still convinces you the next day – you've done your homework.
"Investors have to be willing to hold an investment for the long haul and accept that they'll need to commit for 3-5 years … nothing happens overnight," adds Hennick. Hennick also urges investors to resist checking the investments on a daily basis as market fluctuations and other factors can take them on an emotional roller coaster.
"Investors have to trust their advisors, but advisors also need to be trustworthy by providing answers to their questions and ultimately understanding each investor's goals and risk tolerance." says Hennick.
SOURCE Hennick Wealth Management
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