Earny Asks: How Can I Control My Emotions?

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Never Make a Retirement Investment Based on Emotion

One perk of working in media is that you sometimes get invited to places where you would not normally be. For example, earlier this month, I was invited to the Motorlux party that was part of Monterey Car Week. Attendees were treated to amazing food and drinks, as well as the ability to view amazing cars.

I was there to learn more about Jaguar’s strategy following the release of its Type 00 electric prototype and controversial commercial that blew up the internet. Both the car and the ad are polarizing, but I had the chance to learn more about their plans from the guy who runs the company. I’ll share more on that soon. In the meantime, the Type 00 was at Motorlux, and I had fun seeing the car and speaking to others to learn their opinions.

One of my favorite cars was this dune buggy with a shift knob that had hot dogs floating around inside. Cars should entertain us!

The party was over the top and fun for car lovers from all over the world. I hope I’m invited back in the future!

But the highlight of the night was the auction. I’d never been to a car auction before, and certainly not to one where some rare cars would be sold for more than a million dollars. But the Broad Arrow Auctions team knows their stuff and they know how to get people in the mood to spend money.

It’s a spectacle. The mix of a fun party, combined with a crowd cheering for one bidder or another, or even for the car, is intoxicating, even more so than the alcohol. Newer cars tended to beat their estimates, while older cars generally sold for less than estimated.

As an investor, I watched all of this with interest. The first investing piece I wrote was when I was in college, and it was about investing in classic cars. I’ve written before about what makes some cars worth more than others and, in many ways, it’s based on social factors. That was the key to the Broad Arrow Auctions. It was social and cars were being bought on emotion.

However, investing for emotional reasons is fine when you’re buying cars, but not when you’re investing for your retirement. That needs to be unemotional.

But How?

Earny Asks, how can I control my emotions when I’m investing?

Answer

It’s not easy to control your emotions when you invest. Think about it.

Remember the last time you looked at your paycheck? There was that one line that taunted you. It was money that you earned but which was taken out of your paycheck and sent to your 401(K) provider. Hundreds of dollars, or more, that “current you” was putting aside for “future you.” It was money you could have spent today, but can't.

Or maybe it was that time the market dropped and you heard a friend talking about "BTFD" or that the best time to buy was when others were fleeing the market. You might’ve felt smart. Maybe superior to others.

And then, perhaps last April, when the market tanked, you got scared. You might’ve even sold your stocks and not gotten back in.

Investing is emotional. We’re emotional creatures.

But you can control your emotions.

Of course, there are breathing exercises. I like to use box breathing to calm myself. Breathe in for four seconds, hold for four seconds, exhale for four, and hold for four more, before doing it again. Try it. It works.

But it’s even better to think about controlling your emotions before you have those emotions! 

I know for a fact that in my lifetime, perhaps in the next year or two, there will be a market decline that will catch me off guard and scare me. And there will be nothing I can do about it.

Here are three ways that we can act now in order to control those emotions:

Preplanned thought:

Racing drivers prepare for challenging situations by using a preplanned thought. This is a word or phrase or action that they can use to refocus their attention. For example, when I get passed by a driver that I know I’m better than, I tell myself to take a deep breath. Breathing centers me and allows me to focus on running my race, and not on the other driver. If I’m faster, I’ll get by.

In investing, we suffer losses all the time. When I look at my portfolio, I look at the gains and losses and when I have a loss in a security that I don’t believe will come back, I tell myself that selling that security will make me feel good. Sort of like cleaning my closet. Nobody likes to clean their closet but we feel good when we’ve gotten rid of the things that weren’t helping us anymore. 

Dump those loser stocks and feel the weight being lifted! Then reinvest it into something better!

Mental Imaging

Mental Imaging is another technique that’s used by top level athletes, including racing drivers. For example, when I’m at home preparing for a race, I imagine myself driving the track. However, I don’t just focus on the good laps. I’ll imagine a rainy lap. Or one where a car spins in front of me and I have to take evasive action. This way, when I’m on track and that bad thing happens, I’m able to stay calm.

As an investor, you can imagine buying that hot stock, only to see it drop by 10% or more. How will you react? What will your emotions be? Try to feel them. Become upset. But then, think about the smart decisions that you will make to take control of the situation. 

Mental imaging helps you to plan and to deal with your emotions so that you can make better decisions in real life.

Planning

Make a plan. To continue with my racing analogies, before a race weekend, I lay out my goals. For example, I’ll be racing at Lime Rock Park’s Historic Festival this weekend. While you’re reading this, I might be in the race car, working my plan. On day one, I want to become familiar with a car I’ve never driven and to relearn a track I haven’t seen in many years. On day two, I want to set faster lap times in each session. On day three, I’m hoping to beat cars that I’ve determined are my competition.

In investing, you might consider your asset allocation. Perhaps you’ve decided that your portfolio should hold 60% stocks and 40% bonds. If the market drops, your portfolio allocation might become closer to 50% stocks and 50% bonds. So, your plan could be to sell some of your bonds and buy stocks in order to get your allocation back to normal.

Mindset Beats Emotions

Removing your emotions from your investment process is all about your mindset. Sometimes, we just want to let our emotions get the best of us. But we don’t have to. We can plan ahead and control them and be better investors because of it.