Q: I always do my research whenever I buy or sell in the stock market, but somehow I could not execute my plan well because I easily get carried away by my emotions. How do I manage my emotions when I get too excited or scared of the market? —Zerah Mae by email
Trading in the stock market can be very stressful and painful because it involves a lot of emotional decisions that affect your money.
One reason why many investors lose money in the stock market is they cannot control their emotions, and this often leads to poor investment decisions. Research has shown that losing or winning in the stock market is linked to the area of the brain that responds to pain and greed.
When you lose money, your brain remembers the pain. The same goes with making money, wherein your brain remembers the greed. Between the two, it is the memory of pain that keeps you from moving on, especially if you have suffered so much emotionally after experiencing a string of losses in the market.
Trading in the stock market is more than knowing the fundamentals of the stock or identifying the best price to buy or sell a stock. It is also about having the right mindset in managing your emotions and staying objective in your decision making.
Here are five ways your emotions can get the best of you and the possible consequences.
1. Trying to recover losses back quickly by taking revenge.
It is all right to be angry when you make the wrong trades and lose money but to trade immediately in the hope that you can recover your losses quickly may be the worst possible trade that you can make.
Normally, when you try to make an emotional trade because you are so desperate to win back your losses, you make a larger bet without making a rational decision. You may win or lose in the process but trading this way will make you more like a gambler than an investor. Sooner or later, you may lose all your money in just a short time.
2. Staying on a losing trade hoping the stock will recover soon.
When you make a wrong bet and your stock starts to fall, holding on to the stock hoping that things will turn around in the near future may be a riskier approach because it exposes you to unlimited losses.
For example, if you bought PLDT at P3,486 in 2014 and the stock started its downfall afterwards, you should have cut your losses at 10 percent by getting out at P3,137. At 10 percent loss, you can easily make up for it by reinvesting the proceeds in other stocks.
If you just held on to the stock, your investment would have lost 58 percent by now because PLDT’s price has been declining for three years in a row. The stock will have to almost double for you to just break even. In the meantime, your money is tied up to the stock.
3. Focusing too much on short-term gains without looking at the big picture.
Sometimes, because of your fear of losing, you tend to lock in your profits the moment your stock makes little gains. You may make some short-term profits on good days but on a very bad day, one wrong bet can wipe out all of your accumulated gains.
The way to build wealth in the stock market is to create a portfolio that is founded on long-term investing.
4. Always changing your trading strategy after a loss.
It is very difficult to judge if your strategy is effective or not if you keep on changing it every time you don’t make a successful trade. You need to understand why it is not working. The problem may not be the strategy. It may be the way you execute.
5. Checking your profit and loss every time the PSE index changes.
Paying too much attention to the amount of losses or profits your portfolio makes at current prices can easily make you lose your objectivity. If you see your losses escalating every day as share prices fall, you may panic and make the wrong decision to sell. The same is true if you see your profits growing and you get excited to cash in immediately without looking at your long-term target price.