Investors are often faced with a difficult decision: whether or not to sell an asset that has seen significant gains. Selling could lead to locking in profits and avoiding possible future losses, but it can also be emotionally difficult to part with an investment that has done well. In some cases, investors may become emotionally attached to their assets, leading them to hold on even when it might be more advantageous to sell. So, how do you avoid emotional attachment to assets?
In this article, we will discuss how to avoid emotional attachment to assets and make sound decisions based on market conditions. Make sure to read until the end because emotional attachment is a common mistake investors make.
Can you be emotionally attached to an investment?
Yes, it's entirely possible to become emotionally attached to an investment. Human emotion is a part of us, whether we like it or not. If a company triggers an emotional response in us, we may be more likely to invest in it.
For example, if a company were to be a large part of a happier nostalgic time in our lives, we may be more likely to want to invest in it. Gamestop was a popular place for youths to visit and spend time with friends during their childhoods.
For many, it was a source of happy memories. So when the news broke that the company was being shorted by hedge funds, there was an outpouring of support from the public.
Amateur investors bought up shares, driving up the stock price and causing the hedge funds to lose billions of dollars. This is a great example of how emotions can cause investors to support a company, even if it may not be the most financially sound decision.
What is an emotional attachment to assets?
Emotional attachment to assets is when an investor becomes too attached to a security and is unwilling to sell it, even when it may be in their best interest. This often happens when an asset has seen significant gains and the investor does not want to lose out on potential future profits.
The association with emotional joy can cloud an investor's judgment and cause them to make suboptimal decisions. In some cases, it may even lead to financial ruin. It can also happen if the security is associated with a difficult life event, such as the loss of a job.
The investor may feel that selling would be admitting defeat. Essentially, emotional attachment is a core weakness that all investors must be aware of and work to avoid.
Why it is important to book profits
It is important to book profits for a number of reasons. Firstly, it allows you to lock in your gains and avoid potential losses. Market turbulence is always a possibility and selling early could protect you from seeing your investment decline in value.
Secondly, it enables you to redeploy your capital into other investments that may have more upside potential. Being emotionally attached could lead you to miss out on better opportunities.
Finally, it helps to keep your emotions in check and prevent you from becoming too attached to an asset. When you have taken some profits, you can be less inclined to hold on to an asset that may be declining in value.
Ownership causes emotional attachment. When you take some profits, you are decreasing your equity ownership and can invest without the emotional baggage. Of course, there is no perfect time to sell and you will never be able to time the market perfectly.
However, investing based on emotion is a nearly guaranteed way of selling and buying at the wrong times. For example, if a company is working on medicine for a disease that has affected you or a loved one, it may be difficult to sell when the stock is doing well, even if it's run up significantly.
Tips to avoid being emotionally attached to assets
It's important to have a profit-taking strategy in place before you invest. This will help you to make decisions based on logic and not emotion. Once you have made a decision to sell, it is important to stick to it. Do not let your emotions get the best of you.
It can also be helpful to set stop losses. This is an order to sell a security when it reaches a certain price. By setting a stop loss, you can take the emotion out of the equation and know that you will sell if the stock falls below a certain level.
Robo-advisors and index funds are also an option for those that are very prone to emotional attachments. This is because you are not picking individual stocks and therefore, will not be as emotionally attached to any one company. These fund managers will also sell stocks that are no longer performing well, which will help to avoid any emotional attachment.
Self-awareness is often preached by spiritual gurus. But it applies to investing as well. The more self-aware you are of your emotions, the easier it will be to control them. It can be difficult to be stone cold as humans.
Discontinuing your emotions is not necessarily the goal. Knowing how to control your emotions, so that they don't control you is the key to being a successful investor.
Finally, it's helpful to not take investing too seriously. At the end of the day, it is just money. It's important to remember that there are more important things in life than money. Investing can be viewed as a strategic logical game.
In contrast, you can be emotional with family, friends, and other passions in life. This way when you return to your trading desk or when you view your portfolio, you can productively analyze your investments with a clear head.
The takeaway is that it's important to be mindful of your emotions when it comes to investments. If you find yourself getting attached to an asset, it may be time to re-evaluate your position. Remember, emotions are a part of human nature. It's how we control, disconnect, and evaluate them that will determine our success as investors.
Even the most sound investors can be influenced by their emotions. Understanding emotions are great for improving both your networks and your network. Keep this in mind as a market participant and as a person.