Emotional Aspects Of Investing

One reader had the following questions in regards to controlling emotions when making investment decisions:

How long did it take you to be disciplined to follow your trend change in the contexts of all your emotions that a market may be just “”too high”” when it turns positive to reinvest?

Is that still a very powerful force? You even seem to hedge your rules a bit waiting for the price to go ‘X’ amount your trend line.

Is that a big advantage of a fee based service to invest others’ funds?

Being an engineer by training, I never liked any approach to solving a problem that did not have a clear projection of several possible outcomes along with potential solutions as to how to deal with them.

I guess the need to have some means of control translated into an investment strategy that at offered me an opportunity to try to make unemotional decisions, because I already had decided that I could live with the possible outcomes (via a sell stop discipline).

It’s simple but not easy. No matter how long you’ve been involved with investing, there is always some emotion involved; you just learn how to deal with. Again, if you can live with the projected worse case scenario, then that should limit your emotional involvement.

Most investors have a hard time with it, so for some it’s simply easier to have someone else make the decisions for them. That assumes, of course, that the investor is in agreement with the methodology being employed, especially with the exit strategy.

In some ways, it’s almost easier to handle other people’s money, because you’re not emotionally attached, although you are responsible for it. I try to educate people in advance so that there are no surprises later on.

Much depends on the client’s attitude as well. There are some, whose life consists of following not only every tick of their holdings, but they also tune into every silly investment show on TV. That’s usually counter productive to any investment approach.

I have some clients who simply have no interest in the financial markets at all. They live busy lives and just want to be assured that there is a plan in place to protect their assets in case disaster strikes. They look at the big picture and spend no more than a few minutes a month reviewing their statements.

Even when following a pretty straight forward approach such as trend tracking, there are still subjective decisions to be made. They are not necessarily emotional in nature but require “user input” so to speak. That usually happens at major inflection points when buy or sell signals get generated.

To avoid potential whip-saw signals, I let the Trend Tracking Index (TTI) clearly pierce its long-term trend line before pulling the trigger. That is what I consider “user input” and is designed to simply avoid unnecessary trading signals whenever possible. Sometimes, we have benefitted by such a decision and sometimes it did not matter.

The key is to systemize an investment approach as much as possible, but I don’t think you can expect that effort to reach the 100% level.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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