When is it okay to let your emotions drive your investing?

Bryce: [00:00:26] Welcome back to Get Started Investing a podcast where we answer the most common money and investing questions from our community. Now, if you have just joined us for the first time, a massive welcome, We strongly recommend that you scroll up and start at episode one. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going?

Alec: [00:00:48] I'm very good, Bryce. Good to be here for this episode. We are talking all things investing. Always talk, all things investing emotions when it comes to investing and cognitive biases. 

Bryce: [00:01:03] We are now this is off the back of a question that has come in from Benn. So we'll take a listen to that. But before we do, a reminder that while we are licensed, we are not aware of your personal circumstances. So any information on this show is for entertainment and education purposes only. Any advice is general. But with that said, let's hear from Benn. 

EM Community: [00:01:24] Hey, Bryce and Ren. One thing I'd be curious about is when is it okay to let emotion drive your investing decisions? For example, my investing plan might say buy ETF X because it's my lowest holding right now and we want to keep things even. But then my other holding ETF, why is trading 10% down for whatever reason? My brain says stick to the plan, but my emotions tell me to buy the discounted ETFs because everyone loves the sale, right? I suppose one answer to this is to automate everything and then I can't put myself in that position. But for the sake of this question, let's just say I'm with a broker that doesn't support automation and I don't want to change. That's probably been the biggest topic on my mind lately. And with the volatility of the market over the last 18 months, it's a question I've asked myself many times. Thanks, guys, and keep up the great work. 

Bryce: [00:02:09] Nice. Thank you, Benn. Great question. 

Alec: [00:02:12] So I first of all, want to make the point that, Benn, you asked, when is it okay to let your emotions drive your investing decisions? But then you gave an example which I would say is almost more rational than emotional still. Like you're asking, should I stick to my investment plan or buy another eighth? Because I think it's cheap thinking something is cheap and considering if it's an opportunity is a rational thought. You know, like when I think about emotional decisions, I think, you know, should I buy it because everyone else is buying it, which is like that herding herd mentality, or should I buy it because I'm going to miss out, which is FOMO or you know, I'm going to buy it because I heard Bryce talk about it on a podcast recently, which is, you know, availability, the availability heuristic. It's like you just respond to the most recent information. So I think we should start by saying like, Benn, you're doing okay. Yeah, like if this is your consideration, you're doing well. 

Bryce: [00:03:07] Yeah. End of episode. 

Alec: [00:03:12] But let's actually answer it now because I think it's a fair question around what would you do in that situation of stick to your investment plan or buy because you think something's cheap and then let's have a broader discussion about emotions and investing and and how we manage them. So what would you do if you had, Benn? 

Bryce: [00:03:31] Both.

Alec: [00:03:34] What would you do if you had finite resources and you could only do one.

Bryce: [00:03:38] If you see an opportunity and a stock that you have conviction in. Okay. So the classic example of this actually is go and listen to yesterday's Equity Mates Investing podcast episode where you can talk about this from the point of view of a stock you've had on your watch list that we've spoken about, that you've researched and and have have conviction in dropped 30% and so you took the opportunity to get into it. 

Alec: [00:04:06] Yeah, bought it for the first time.

Bryce: [00:04:07] So that is not emotion driving that decision. That's, you know, a thought and and a strategy behind it. So in this instance, if Benn feels like that there's an ETF that is, you know, has fallen to the point where he thinks there's an opportunity from a valuation point of view or whatever it might be, then I don't see that as as being driven by emotion. 

Alec: [00:04:32] Yeah, Yeah. 

Bryce: [00:04:33] And on the flip side is if you have finite resources, it's a recognising that you should try and get back to your strategy as soon as you can. I think diverting away from your strategy for long periods of time is is dangerous because that's when you then start to put I guess that's when emotion can start to have a bigger role when you don't have a strategy in place. But if you see an opportunity, there's nothing wrong with taking that outside of your investment strategy.

Alec: [00:04:59] Yeah, Yeah. I would say the only thing I would add to that is just be careful about thinking I overall stock market index is cheap because it's fallen 10% or something. It's not quite the same as a stock where it's like one company where you can do a valuation exercise and say, Here's what I think fair value is. It's a lot harder and a lot more subjective to say. Here's what I think fair value is for an overall stock market index. Yeah, And so just because something's fallen 10% doesn't mean it's cheap and it will sort of revert to the main or anything like that in the same sense that it does when you're talking about an individual stock that you're valuing. And so I think for me, the way I would approach that personally is stick to my investment plan, because when I'm investing for my core portfolio, I'm just and I'm buying large market tracking indexes like the ASX 200 or the S&P 500. I'm not really thinking about the price. And is it a bargain or is it overvalued? Like for me the most important thing is consistency and just dollar cost averaging in regardless of the price. But if you do have a view that an overall stock market is cheap and you've done the thinking and the work and it's not an emotional buy because it's fallen, but it's like I think there's an opportunity here. You should take your opportunities if you say them, but otherwise stick to your plan. And as Bryce said, get back to your plan as soon as possible because you would have put thought into the plan and like there was reason behind the plan. Hmm. Yeah. 

Bryce: [00:06:41] I think to the second part of the question, which is, is it okay to let emotions drive your investing? Yeah. 

Alec: [00:06:47] Is it.

Bryce: [00:06:50] No. 

Alec: [00:06:52] Yeah. I mean, fair. No, I think the fact that you're recognising this as a question is a really good sign, and I think deep down you probably know the answer. 

Bryce: [00:07:00] Yeah, I think no is the answer. Is it easy to do? No is the answer. Is it easy? 

Alec: [00:07:07] Sorry. Sorry. Is it easy to do? Yes. Is the answer like it's easy to let emotions control your own?

Bryce: [00:07:11] Sorry. Yeah. Is it easy to invest without emotion? No. Does it become easier when you have a strategy in place? Yes. And I think for me, the learning over the last five years of doing this podcast is I almost all professional investors have a framework and a strategy that they play in so that they don't allow emotions to take control yet. 

Alec: [00:07:34] And yet most of them still get caught up by emotion, say Nvidia and Novo Nordisk this year as two classic examples. Yes. 

Bryce: [00:07:44] The second part to that is that and I used to think an investing strategy was, you know, involves like levels of valuation and spending hours doing research. But an investment strategy can be as simple as what we've spoken about time and time again on this show, which is just plugging away at a core portfolio of ETFs.

Alec: [00:08:09] Not only not only can it be used. For most people, it should be like the for most people, most of the time, you shouldn't really need anything other than a core portfolio. And if you disagree with me on that, we wrote a book about that. We did. Yeah. And the fact of the matter is most professionals struggle to outperform the overall stock market over a long period of time. And, you know, a lot of the people that have put money in their funds would have been better off just doing a core index portfolio. So, look, I think to answer the question, try not to let emotions drive your investing. It's easier said than done, but then you recognise some of the key ways you could do it. Automating it, signing up with a broker that lets you automate is a great step. And then if you say if you think you see an opportunity, don't feel like that is being emotional. As long as you stop and think and you're like, is this actually an opportunity? 

Bryce: [00:09:08] I was just going to say on the resources pace and not going off your strategy, say you have 100 bucks a fortnight to invest and you want to put that into a core portfolio, but you know, you're also going to be interested in taking opportunities as they come once a month, whatever it may be. You don't actually want to invest the full hundred. You want to make sure that you're investing 95% of it so that you've got that little pool on the side that you can take opportunities with. Otherwise you're going to find that you will divert from your overall strategy, which is taking that 400 and plugging it in somewhere else, and then you're off track. That's always how I do it. 

Alec: [00:09:45] Yeah, I mean, whatever works for you.

Bryce: [00:09:47] Is otherwise you'll never have a pool of cash. Yeah. Sign. 

Alec: [00:09:50] Well, let's put a pin in this conversation because let's take a quick break. And then after the break, I want to talk about what emotions we suffer from and how we try and control our emotions when investing. So you've just given us one day. Let's take a break and then talk about some more. Welcome back to get started Investing today. We are talking all things emotions when it comes to investing. Cognitive biases you may have heard referred to as all the tricks our brains play on us to stop us being perfectly rational consumers and investors. Before the break, we answered a question from Benn about when is it okay to let your emotions drive your decision making? Bryce bluntly said, Never. So we'll move on to the second part, which is when do emotions affect our decision making as investors? So, Bryce, what do you suffer from?

Bryce: [00:10:44] The biggest one, I reckon, at the moment is choice paralysis.

Alec: [00:10:48] Okay. Explain that. 

Bryce: [00:10:49] So outside of the core, there are a lot of opportunities and a finite amount of resources I have to deploy into those opportunities. And so when it comes to choosing which one to invest in or deploy, I often find myself not making it an active decision because I'm overwhelmed with the choice in front of me. Yeah. And so I ended up not doing anything. And that's what I think. You know, when you really do get your automated core pace up and running, it's good to have that there because it really helps with choice paralysis. But that's one that I find at the moment is we have so many opportunities come to us through the podcast and through what we're doing. It's just kind of like, Which one? 

Alec: [00:11:32] Yeah, yeah. 

Bryce: [00:11:33] That's one for me. What about you, Erin? 

Alec: [00:11:35] So a couple for me, I think I am a big sucker for confirmation bias. So that's where all form of you and then I will overweight information that supports that view and underweight information that disproves that view. And so that will just lead me to hold onto stocks that. I was perhaps wrong about for too long. So that's a big one. Another one that I find there's a cognitive bias called the availability heuristic, which I mentioned a little bit earlier. But it's really where like you overestimate or overweight information because it's more available or you've seen it more recently or you say it more often. And I think that's a classic one on this podcast and this like really privileged situation where in where we get to speak to all these experts. And if I hear a couple of experts mention a stock like very quickly that go to the top of my watch list and it'll be the stock that I'm thinking about rather than being like, what? What is everything that's available? Yeah, yeah, yeah. So like, for me, I find it really hard just because there's so much information and so many companies out there. But you mentioned that for choice paralysis, But I don't think I get paralysed. I think I just like don't act rationally and just jump into things and. 

Bryce: [00:12:53] Yeah, I think that's what they're combined for me. Like the choice paralysis comes from the whole like don't just act right. Don't just act irrationally and start throwing money into things. So then I'm like, Whoa, I haven't done enough thinking about these opportunities and I've been burnt in the past by doing irrational thinking and just throwing money at it. So they don't like wildfire. Let's just get back to the core. Yeah, I think one that I've been very good at recently is avoiding loss aversion. 

Alec: [00:13:22] Okay? 

Bryce: [00:13:23] Which is the feeling that you're you're down and the feeling of realising that loss is more than the feeling of it going back up and winning it and it going up. And so you hold on to something that is at a loss because you don't want to feel like you've made that loss. 

Alec: [00:13:42] Yeah. And the classic example or the behaviour that comes out of that is people will lose money on a stock and be like, I'm going to, I'm going to sell as soon as it gets. 

Bryce: [00:13:52] It's a dollar. 

Alec: [00:13:52] Yeah, I'll sell and also. 

Bryce: [00:13:54] I'll sell and I may never do that. So I used to have that. But now having done this show for a number of years, I'm fully aware of it and I'm, I think I've got it out of my system where it's just like a loss is a loss that money can go to use elsewhere. My thesis is broken. It's. Let's just get out. 

Alec: [00:14:13] Yeah. Yeah. So that's good. So I guess how, what are some of the strategies you put in place to take your emotions out of investing? 

Bryce: [00:14:22] Or the obvious one is automating the investment process for 80% of my portfolio so that I don't have to touch a single thing and I don't have to think about when money is getting invested. Yeah, I think if you're not thinking about it, you're not letting your emotions get in the way of things. And we've spoken about this on the show and we've written about it in the book on how you can actually execute it. 

Alec: [00:14:41] We've literally written the book on it.

Bryce: [00:14:43] Yes. So I think. I think that takes away a huge amount of emotional stress and pressure from. 

Alec: [00:14:50] You could almost say you don't stress and you just invest. 

Bryce: [00:14:55] Yes, And then I think on the flipside is just being very conscious of what I'm affected by, as I just said, like loss aversion. I'm conscious of that, that that's a thing for me. And so every time I come to make a decision, I try and actively think, what am I likely to be susceptible to here and force myself to make a decision against that? Yeah, I imagine you would be similar. 

Alec: [00:15:16] Yeah, I think two things for me. The first one is around the media and the news that I consume like so much of business news and I guess just news generally is optimised for an emotional response because that drives, clicks, views, downloads. I mean, we're in the digital media game, so who am I to talk? I guess. But what I found personally is consuming less has been really great and being quite deliberate about the stuff that you consume. Focusing on high quality and long term sources of information and podcasts I think are pretty great for that. And getting away from a lot of the more noisy stuff has just been really valuable in taking the emotion out of the day to day noise and feeling compelled to do something or to sell something, buy something, whatever it is, and just being really clearer in my thinking, like less is more. I think when it comes to investing, it also means it gives me more space to consume other topics of interest midweek, AFL podcasts and the like. So that's one high class. Yes, yes. The second one is I think the greatest superpower when it comes to investing is being lazy because there is nothing that will dull your emotional response that you've got to do something than just an overriding laziness. And I am quite lazy and so I'm not checking my portfolio heaps or anything like that. I've got like, especially when it comes to my core portfolio of ETFs, it's automated. I don't check it often and it just takes away in the background. I get a text every four. The money that has been the money's been invested, and I get on with my day. And then when it comes to my satellite investments, you know, like the individual stocks that I'm buying. Just the fact that I don't feel this need to, like always be doing something. And I just embrace the fact that being lazy is okay. It just means that, like my pace of investing isn't as fast. So I think there's a real power in resisting the share market by constantly updating you with new information in terms of changing price. And there's all this content that is created around like the day to day movements and that content is all designed to heighten emotions and get you to click and download and act. And like the more that you can just remove yourself from that and being lazy is a great way to do that. I think it's just like it's been the best thing to manage your investing emotions. 

Bryce: [00:17:52] Yeah, I think being lazy is good if you have a plan and a strategy. Don't take that as being lazy.

Alec: [00:17:59] Being lazy is terrible if you like. Don't get started. 

Bryce: [00:18:01] If you don't do anything. 

Alec: [00:18:02] Yeah, yeah, yeah, yeah, yeah, yeah. I mean, maybe that being lazy is the wrong word, but it's. 

Bryce: [00:18:06] Yeah, it's not like being over active. Anyway, thank you for the question that has come in from Benn. We really appreciate it. As we said at the top of the episode, this podcast is all about answering money and investing questions from our community. So keep them coming in. If you'd like to ask a question, send us one at contact at Equity might second or we're available on all of the social media channels. Now we also have a Get started investing newsletter that is available. We send it out each week and it has plenty of tips for you if you're just getting started on your investing journey. So make sure you're subscribed. We'll put a link in the show notes as well for you to subscribe if you're not already. But as always, thank you for your support and then we will leave it there. Pick it up next week. 

Alec: [00:18:53] Sounds good.