By nature, humans are emotional creatures, so everything they do is motivated by their emotions. But is it always okay to let emotions drive your behavior? Not really – especially when it comes to the crypto market, which is known for its high volatility.
Keeping your emotions in check is one of the most important things to do if you want to succeed as an investor. This will help you navigate btc price fluctuations and avoid getting entangled in fear or media hype and making poor investment decisions. This blog explores the concept of emotional investing and how to prevent it, so keep reading!
Understanding emotional investing
Emotional investing occurs when an investor makes a decision based on behavioral instincts rather than technical research. Expert investors spend a lot of time doing extensive research before predicting future market trends, but many end up falling into the trap of emotional investment. This is mainly because they seek to maximize profits, making them susceptible to impulsive investing decisions.
Daily market movements are driven by the market’s ‘mood’, but facts are the driving force behind long-term success in the crypto space. We talked previously about how humans are naturally guided by their emotions; however, other factors lead to emotional investing:
- Investors feel overly optimistic: A positive trend in the market often leads to the optimism phase, and investors start to feel ecstatic when thinking that this will help their accounts grow. Thus, many investors who don’t know how the market works are enticed to participate without assessing their risk tolerance. If the market value is high for a long time, the enthusiasm will only keep growing, leading experienced investors to take on more risks than they should.
- Investors feel anxious about their investment: Identifying the anxious phase can be pretty challenging, but it often affects experienced investors, as fear and despair meet and leaves them wondering whether they should stay or leave the market. This happens when there’s an abrupt change in market trends, causing investors to follow the herd and act impulsively.
- Investors panic: Since the crisis doesn’t seem to end, investors start feeling more and more concerned. The majority of them want to sell, even those who expected the decline to last only for a short period. At this stage, investors are desperate, as they have already lost some cash and want to prevent further financial losses.
- Investors lose hope: This is the final phase of the emotional investment cycle and is similar to the first. After an extreme low, the market enters into a bull condition, and while those who exited it are disappointed, those who stayed hope for the rising trend to continue. However, withdrawn investors may hesitate to enter the market again, even under these positive conditions.
6 ways to avoid emotional investment
The first step to avoid emotional investing is recognizing how it works and understanding that you are vulnerable to strong impulses due to financial market fluctuations. Once you become aware of this aspect, you can implement some strategies to avoid emotional investing.
Avoid timing the market
Rather than trying to time the market, you should create a long-term goal and focus on it. The truth is that the crypto market is highly volatile, and not even the most experienced investor can predict how the market will perform. Timing the market will only jeopardize your goals and likely result in bad calls, so focus on building a solid portfolio instead.
Don’t check your investments obsessively
Avoid tracking your investments daily – this will only make you susceptible to emotional investing when the market is characterized by high volatility. Staying committed to your investments is, in fact, the key to succeeding in the market in the long run. As the crypto market has shown, those who learn to block out noises and remain focused on their goals are the ones who are rewarded in the end.
Look at the big picture
When you feel like you’re getting track, remember why you started your investment journey. Think about how your financial situation is different now and whether there is enough diversity in your investment strategy. Answering these questions will help you see things clearly, so you won’t get stuck in the discomfort you experience.
Diversify your portfolio
Diversifying your portfolio is a smart move as an investor, and it plays a crucial role in avoiding emotional investing. A balanced portfolio will prevent you from making impulsive decisions, putting you in a safer position in the market. Plus, diversification reduces the risk of experiencing losses, and by knowing this, you’ll feel more in control of your emotions. No two assets perform the same, so when you build a diversified portfolio, you stabilize your results and boost potential returns.
Let the news inform (and not influence) you
During a bear market, the news can cause anxiety and stress, thus leading to poor investment decisions. Hence, it’s important to not react to the news and only use them as a source of information. And this may be evident, but always make sure that you’re reading crypto-related facts from reliable websites. Don’t simply believe everything you see on the Internet – instead, take it with a grain of salt and remember to keep your goals at the center.
Consult a financial advisor
If you struggle to navigate the crypto market on your own, consider seeking the help of a financial advisor. An expert can explain your position in the market and help you assess your risk tolerance. Plus, getting advice from a financial professional also enables you to rethink your investment strategy and see what changes you can make in order to increase your chances of success. This way, you’ll be more logical and rational when making investment decisions.
Our takeaway
Humans experience all kinds of emotions, including sadness and fear, and sometimes, they can be truly overwhelming. For instance, FOMO is very common in the crypto space, and many investors have difficulty avoiding it. However, keeping emotions out of investing is crucial so you can succeed in your crypto journey, and you can do so by thinking rationally and sticking to your primary investment goals.
Rupali Gupta is a blogger and professional writer who loves to write about technology and entertainment. She is always up to date with the latest celebs’ news and the entertainment world.