By Richard Hanson
Building a great portfolio as an investor or trader should always be a practice that’s based on logic. You need to understand the market, do your due diligence, and learn as much as you can about every asset that you’re thinking of getting involved with. That’s the only way to feel confident when you’re buying or selling securities. Unfortunately, it’s not easy to make decisions with your money that don’t have an emotional impact. While most of us know that there’s more to life than cash, it’s hard not to feel nervous when you have the potential to lose money, or hopeful when a chance to build cash comes your way. So, how do you know when your emotional side is causing problems?
Balancing Risk and Reward
Successful investing is all about balancing the right amount of risk, with the best level of reward. Unlike placing your money in a savings account and waiting for it to gain interest, trading in stocks and securities comes with a lot more risk to think about. The wrong decision could easily mean that you lose your cash as quickly as you make it. The strategy that goes into avoiding risk is why so many people spend their time paper trading and working with demo accounts for a while before they begin using real money. It’s important to feel confident in the strategy that you’re going to use. Crucially, finding the right strategy means walking a fine line between too much, and not enough risk. Take too much, and you might panic and jump out of a position faster than you need to. Take on too little risk, and you’re not going to get the right amount of growth.
Figuring Out How to Manage Your Emotions
Every master of the stock market, or expert in forex trading has had a moment of indecision in the past. There are times when all of us let emotions get in the way of making the right decision. Unfortunately, the worst choice you can make in any trading environment, is the one that reacts to your emotions, and not your knowledge. Fear and greed are dangerous enemies in the money-building world. They come from worries about the future, or frustrations with your current situation. They can even get exacerbated by the media and other people around you. If you’re not sure what to do, the best idea is often to take a step back, and center yourself.
Think back to the goals that you set when you first started investing and ask yourself how each next step would take you closer to those goals. Do you have a target date when you want to reach a certain amount of cash? That could mean that you need to take a little more risk. Do you know less about a particular asset than you would like? This is a sign that you should show caution. Think about the whole context of the situation in any buying or selling decision you make. When emotion gets in the way, that’s when you start to lose money.
