MarketPsych: How to Manage Fear and Build Your Investor Identity

Chapter 4. Your Investor Emotions: The Hidden Drivers of Behavior

"But I don't want to go among mad people," said Alice. "Oh, you can't help that," said the cat. "We're all mad here."

——Lewis Carroll, Alice in Wonderland

Few subjects are more emotional than that of money. We feel anger, fear, and sadness when we lose it, security, satisfaction, and joy when we acquire it. Money is a great source of pride for some and shame for others. This vast ocean of emotions churns below the surface of consciousness driving us in different directions. Knowing why, how, and when money influences our emotions is a crucial step toward establishing a sense of who we are as investors, and ultimately becoming a better financial decision maker.

This chapter will explore the range of emotions investors feel, the effects they have on our investments, ways to manage those emotions, and ultimately techniques for making better choices when emotions run high.

Restless Ed, the Redemption-Seeking Channel Trader

Ed is a 61-year-old male who no longer works. He has close to $12 million in investable assets, but prior to the collapse of the stock market in 2008, he had $1.5 million. In March 2009 he met with his financial advisor and revealed that he wanted to make some changes in his investment strategy.

The following is part of a transcript from that meeting.

Ed:

The Dow has been moving up and down constantly. I want to use my cash to buy the Dow when it hits 7,000. When it comes back to 7,500 I'll sell. When it goes ...