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Valentin Ivanov is an Estonian entrepreneur and co-founder of an alternative investment fund Quanloop.
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When it comes to investment, there are two camps: One says you should “go with your gut,” and the other says you should always make rational, logical choices.
Falling prey to the idea that emotion and logic are two separate paths that cannot cross is a problem for most investors, and it leads to myriad poor outcomes that have a ripple effect in all areas of their lives.
It’s easy to say that we should simply avoid allowing emotions to creep into investment choices, but this isn’t always realistic, especially on a corporate level. Rather than giving free rein to the more “primal” emotions of fear and greed, as are typically outlined in the markets, I encourage a third option: learning how to make emotions work in your favor.
Unfortunately, even if you’re striving for a perfectly balanced approach, there are never any guarantees that things will go as planned. There will always be endless amounts of investor “noise,” but having clear-cut goals and the right mindset will help you cut through the chatter and protect your portfolio in the short and long term.
Fortunately, I have a simple solution for achieving the right mindset that only requires a single missing element: emotional intelligence.
Here’s Why The Right Emotional Mindset Can Improve Investment Choices
Emotional intelligence is defined as “the capacity to be aware of, control and express one’s emotions.” Psychologists also incorporate traits like the ability to accept change, uncertainty, mistakes and personal limitations, particularly in difficult situations, as key signs of emotional intelligence.
In a study titled, “Emotional Intelligence and Investor Behavior,” authors John Ameriks, Tanja Wranik and Peter Salovey define emotional intelligence as the ability “to recognize and use emotions productively.” This means that emotional intelligence is less about “being in touch with your emotions” and more about being able to make your emotions work for you instead of being controlled by them (which is the common human experience).
For investment purposes, emotional intelligence allows you to recognize and interpret emotions, then integrate that information into a productive strategy that actually helps you make more reasonable, optimal financial decisions. Because we can’t escape our emotions, the best move is to think of them as “advisors” offering valuable information about which decisions are the right ones to make.
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Can We Create An “Investment Matrix” To Always Make The Right Choices?
While there is no guaranteed “decision matrix” that will always lead you to financial success, you can use your newfound framework of logic and emotional intelligence to create a more reliable strategy for long-term and short-term investment choices.
It’s important to remember that uncontrolled emotional investment creates a much more chaotic portfolio, and it can also have a detrimental effect on an investor’s overall well-being. When you constantly allow the roller coaster of the market to dictate your emotions and investment decisions, you end up living in a state of high anxiety and chronic stress. Over time, this causes physical and mental exhaustion, both of which negatively impact investment decisions and general quality of life.
Conversely, trying to ignore or compartmentalize your emotions (positive or negative) can leave you with blind spots that cause you to make mistakes as well. Using the full spectrum of your emotions (even turbulent or disruptive ones) to enhance thinking and problem-solving skills is the best way to make optimal financial decisions, regardless of whether the market is up or down.
Emotional Intelligence Can Revolutionize Your Investment Portfolio
Any successful investor considers factors like market momentum, asset diversification, demand management, price volatility, entry and exit strategies, and the appeal of safe havens when managing a portfolio. These are logical, fact-based data points that inform decisions.
However, it’s challenging to look at plummeting graphs or market spikes and not feel compelled (by instincts like fear or greed) to take swift action. This is short-term thinking, and the market can just as easily make a sharp pivot in the other direction at a moment’s notice.
Seasoned investors understand how to “ride out” the swings because they have a clear vision, measured approach and risk tolerance that has been carefully calculated for long-term success. They don’t let “gut feelings” or the sharp peaks and valleys of a volatile market shake them from the path they’ve laid out. They might not call it this, but these behavior patterns are signs of a sharply honed emotional intellect.
Yes, emotion can sometimes overwhelm logic in the best of us. Still, the best investment strategy is to learn how to manage your feelings and use them to infuse a higher degree of reason into your choices. Understanding your own emotions and the emotions of others can help you see through the moments of panic and keep a level head, no matter what’s happening around you.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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