7 Simple Ways We Remove Emotion From Investing (Become a better investor and happier person)

Emotions can feel great. Falling in love, joy, sorrow, etc. Yes, the human experience! Wonderful for life and Shakespeare, but unfortunately not wonderful for our investing life. And with pensions and social security on shaky ground, younger generations will need to master their emotions in order to have a secure retirement.

Gone in a flash

It can take 30 years to build a substantial investment portfolio and a day to destroy it. This is why we advocate simple, low cost, straightforward and diversified investment portfolios. But if we are not careful our emotions can trick us. You see, we do not always see the world or ourselves clearly. We make up things, fill in gaps, let the ego take over. In my opinion this can lead to a miserable life and horrible investing outcomes.

Buy high and sell low

Why do people do the exact opposite of what is good for them in life? For example, millions of folks buy assets when they are high, then sell them when they are low and the music has stopped. In many cases, if they would just exercise some patience and wait, the asset may rise again.

2009

I remember a guy that half his investment account crashed with the great recession. He said he was done, took his money out and was mad. He missed out on a 10 year bull run that saw amazing stock market returns. If he had just done nothing. You know what did him in: his emotions!

How can we succeed

As silly little monkeys, how can we succeed at investing, or at least not lose our shirts? Here are a few simple ways experts recommend we keep our cool and prevail in the long run:

1. Know History

We easily forget history. Historically the market has ended up positive 28 of the last 36 years. In addition, the average bear market lasts 15 months. The point here is it is probably best to not do anything, just let it ride. As described above, if that dude had just waited and done nothing in 2009, he would have enjoyed 10 years of healthy market returns. The key is practicing patience if the investing fundamentals are sound. As we know, in the moment the market is a voting machine, over the long run it is a weighing machine.

2. Small Withdrawals

Remember that in a way it doesn’t matter exactly how much your account is worth at any given time. What is important is that you can withdraw a small amount each year, for example using the 4% rule. So what if in a down year the account goes from $500k down to $400k, you are not withdrawing the whole amount, you are feeding off it slowly.

3. A stock is not Juliet

We do not need to fall in love with our stocks, they are a tool and a vehicle to build wealth and assets. Sometimes things do not work out and it may be time to sell a stock.

4. Play money

We allocate about 5-10% of our portfolio for fun investment money. It could be called gambling. But for me it gets stock picking out of my system. Of course, the other 90% is safely tucked away in low cost index funds. But the 10% let’s me get the lead out and play around with Tesla and other risky investments for fun. If I lose it, fine, my life goes on.

5. Follow Buffett

One of our methods is to follow Buffett & Berkshire Hathaway when it comes to choosing stocks. His team has done all the hard work of crunching the numbers, interviewing management, watching the company for years, ensuring there is a moat, etc. Some basic Buffett rules that reduce stress and emotional decisions:
  • Invest early and often in low cost index funds that are balanced to meet my specific goals and risk tolerance.
  • When good quality company stocks or the broader market goes on “sale” or down in value, think of this as a good thing and buy some. When something I want goes on sale I want to buy it at that point! Harness the power of dollar cost averaging.
  • Have a clear, simple strategy for building wealth over time. No short term gimmicks or get rich quick, just good old fashioned building of wealth one brick at a time.
  • Understand and harness the power of compounding by investing early, often and letting dividends reinvest and ride.
  • Have long term faith in America, yes we always face some kind of challenge, but it is still the best system in the world and we are always working to make it better. Good solid American companies and the American people have a bright future for a long time to come. We still have the secret sauce of strong institutions, free markets, law, property rights and a culture of innovation and can do spirit…
  • Don’t try to beat the market or wall street.

6. Remember the joy when things drop

Re train your brain to understand that in some cases when assets drop in price, this is a good time to buy some more. Remember the value of dollar cost averaging as one of the key aspects of the investing trifecta! The current market meltdown of 2018 is a perfect example of how you can harness this now. When you make those bi-weekly contributions to your 401k right now, notice you are now buying more shares because the shares are lower. If you have 10, 20 or more years to “retirement” or financial independence, in an ideal world the value of shares would plummet even more. You begin to cheer stock market declines and get excited about them. You will enjoy seeing quality stocks and index funds lose value as you load up on more.

Dividends

Also keep in mind that when stocks drop, you could focus more on your dividend income. As long as the dividends keep rolling in, then you may not worry too much about the actual stock price. Dividend Aristocrat or King: Numerous studies have shown that dividends make up a big percentage of total stock returns. Estimates suggest that stocks returned about 9.4% annually between 1900 and 2010 and that dividends made up 4.4 percentage points of this return. If a company has returned a dividend for 25 or more years, they are a Dividend Aristocrat. If they have paid a dividend for over 50 years they are a Dividend King. A good example is Johnson & Johnson with 53 years of dividend increases.

7. All weather portfolio

Jerry and I generally use “all weather” or a “sleep at night” portfolio“. When the market was going crazy recently I did not think twice about it, besides thinking about some deals. My assets are balanced among low cost stock index funds, long and short term bonds, real estate, REIT’s and high quality dividend stocks.

Many ways to chill out

What are others ways that emotion can be removed from investing and in work and life? In many ways it might make a person happier and more content to not be a slave to their emotions.

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