How To Beat the Pitfalls of Emotional Investing

Let’s face it, when the market is going through the kind of volatility investors have been seeing lately, it can be difficult to keep emotions out of your investing strategy. In this segment of Backstage Pass, recorded on Jan. 26, Fool contributors Rachel Warren, Jason Hall, and Connor Allen discuss.

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Rachel Warren: Going on this pattern of what’s been happening in the stock market lately, understandably, investors are having a tough time in some cases, dealing with the emotional upheaval that often accompanies just the high levels of volatility that we’ve been seeing in the market lately, so I wanted to get some personal takes from both of you and feel free to tap into personal anecdotes for this one.

How can investors manage the emotional rollercoaster of ongoing stock market volatility like we’ve been seeing lately? Should emotions even play into investing at all? Jason, what are your thoughts on this?

Jason Hall: Let’s go back about 12 or 13 years ago, somewhere around there. Picture me in the summer in Europe for 17 days. I was a miserable person to be around for about three days. Then my wife explained to me that if I valued our relationship and I wanted it to continue, I would stop finding every McDonald’s (NYSE: MCD)I could to get on the internet to check my portfolio.

Seriously, it was so unhealthy. At the time, I wasn’t working for the Fool, I wasn’t doing what I do now, I had a job like [laughs] everybody else, and stocks was something that I was passionate about pursuing outside of my work time, definitely not something to mess around with on vacation.

But I learned an important lesson that you have to take things like this and put them in the box that they belong in. It helps you to manage your emotions when you put it in check and remember that it’s still going to be there.

One thing, it’s like creating a healthier framework. But the other thing I think about it is it’s like everything else. If you want to lose weight, willpower doesn’t work. We all feel like a failure if we don’t lose weight because we just can’t will ourselves to not eat that box of crackers.

Don’t have crackers in your cabinet if you cannot eat them and you want to lose weight. The point is, you build a framework and you have a process to support the habits that you want to have happen. The things that you want, the outcome that you want, you build a process, and that’s how you get to it.

You don’t willpower your way to get to it. It’s the same way with investing. I can promise you, if you have trouble getting through these periods without doing something and you haven’t built a framework and steps and rules that you have to follow, you’re never going to get there.

Here’s a rule that I put into place. When we see these markets sell-offs like we saw, if we see a 10% correction, the S&P 500 falls 10% from a recent high, it triggers a rule. This is like one of the only rules that I have. The cash in my portfolio, I have to take half that cash and I have to go buy stuff. I have to. It’s the rule, I have to. I started working on that today actually, I deployed about half the cash today.

Over the next couple of days, I’m going to deploy some more. It gives me something to do. It means that I’m not going to screw around with the companies that I liked that have fallen because I keep just a little bit of cash, usually about 5% or so is like the maximum amount of cash I have.

Gets more than that, I started getting itchy, but it gives me something to do. Actually, in a weird perverse way, actually makes me look forward to getting these occasional 10% drops because it means I can take some of that cash and I can go have fun. Then I’ll leave the other stocks alone, I’ll just leave them alone. That’s the thing that I do.

Rachel Warren: Awesome. Thank you, Jason. What about you, Connor?

Connor Allen: Personally, I try to remain as emotionless as possible. I know that’s a lot easier said than done, but when you have extreme and quick declines in the stock market, and then a day like today where it’s up big and then it goes down big in the same day in a matter of hours.

If you’re basing your emotion and market sentiment on those short-term moves, that’s going to be very difficult for you to not invest on emotion. In 2020, I was pretty terrified about the market in general. I didn’t know what was going to happen, nobody knew what was going to happen.

Nobody knew about COVID-19, that know how serious it was, or anything like that. That was a lot more difficult for me to handle than this time around in this correction because this seems more just like a natural market correction, this time around, it’s not like the whole world is going to end. If you talk about handling this correction, I think it’s different than handling something like in 2020.

But one thing that I like to do is if you go to YouTube and you just look up some videos from the beginning of 2008 or from CNBC, or you look at some videos from CNBC at the beginning of the pandemic, you look at the mania that people were dealing with and how crazy everything was, then you go back and you look at the S&P 500 chart since that time, and you can just relax because it was so crazy back then.

I was part of it, I was part of being scared about what was going to happen. But then you go and look at the chart and you see how the stock market has performed since then and you can just relax.

I think that’s a great thing to do. Also, always go listen to David Gardner’s podcasts on some mental mindset tips that he has and he’s got a lot of great stuff.

Connor Allen has no position in any of the stocks mentioned. Jason Hall has no position in any of the stocks mentioned. Rachel Warren has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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