We discuss our new research on how emotions effect the investing process and why being cautious may not be a bad thing.
One in three young investors feel anxious when deciding what to invest in
Our new research from highlights the emotional journey many investors face when deciding where to invest their money.1
Caution is the most prominent emotion felt by investors, with over a third (36%) feeling cautious when deciding what to invest in, followed by feeling anxious (15%) and nervous (15%).
However, young investors (aged 18-24) are far more likely to experience these emotions compared to older generations with almost one in three (31%) reporting anxiety when deciding where to invest their money, while 34% feel nervous.
|Age range||% reporting anxiety when deciding what to invest in|
As young adults, this age group is likely to be far less experienced when it comes to investing so a sense of anxiety or lack of confidence is understandable. What is crucial however is that young people do not let these emotions dissuade them from investing altogether.
With interest rates near zero and this generation facing new and unprecedented financial challenges in the wake of the pandemic, investing is a crucial way for young adults to grow their savings meaningfully over the long-term and enable them to achieve their financial goals.
Caution and anxiety may lead to better outcomes
While caution, nervousness and anxiety may not be welcomed emotions, research shows those who experience these emotions when weighing up their investment options take longer to do so. Feeling stressed about investing leads to people taking the longest time to make a decision about doing so (39 days), followed by feeling anxious (38 days), nervous (35 days) and cautious (25 days). However, a longer deliberation time could lead to more considered decisions and lucrative outcomes.
In contrast, those that feel excited or confident to invest spend just two weeks deciding what to invest in. Those that feel excited spend 13 days, while those that feel confident take 15 days on average to decide where to invest their money.
Caution, nervousness and anxiety are perfectly normal emotions to feel when investing. It’s important to not let these emotions take control of the investment process and instead harness them for good.
Displaying these emotions can actually be a positive sign. Those that feel nervous or cautious are far more likely to take their time and do more research in a bid to quell their anxiety. It’s important to lean into these emotions rather than ignore them as it could lead to a more considered investment approach and better long-term outcomes, compared with those that make decisions too quickly or impulsively.
To keep anxiety and nervousness in check, and stop emotions and impulses from overtaking your investment strategy, Andy Parsons shares the below tips:
Channel your emotions in a positive way
Rather than ignoring these emotions or letting them overwhelm you, address these emotions head on and channel them in a positive way. As a way of resolving and settling these emotions, it may be that you take more time mulling over your options or conduct additional research. This in turn is likely to lead to more positive investment outcomes.
Stick to familiar territory
Parting with your hard-earned cash and deciding to invest in a company or fund is a significant decision and it’s understandable that many of us feel nervous or anxious when deciding to do so. Investing in areas you’re familiar with and know are likely to perform well can be one way to assuage this doubt and build greater confidence.
Set ground rules
Many investors know how much of a loss they’re prepared to tolerate, but the same can’t be said when their investment is growing. Investors can often get over-excited when their investment is growing and become reluctant to capitalise on these gains for fear that greater gains might be just around the corner. To stop this excitement getting the better of you, consider setting a pre-determined level of gain. You can then bank this gain and reinvest it into another investment or simply withdraw the original investment and only leave the gain invested. This subsequent investment is, theoretically, a free investment as it hasn’t cost you anything.
Be prepared to let investments go
Sometimes investors can also be irrational when investments go down and persuade themselves to hold on for a variety of reasons which often reflect their emotional attachment to the fund or stock, or a fear of crystallising a loss. While it’s important to take a long-term view when deciding whether to hold or sell, if a stock or fund has continued to perform negatively and the outlook is negative then it is better to cut your losses and invest the remaining money in assets which stand a better chance of making you money.
Set a stop-loss
Setting a stop-loss can help take the emotion out of investing and combat any indecision that arises as to whether you should sell. Deciding the maximum loss you’re prepared to weather before selling, means should that day ever arise you’ve already reached a decision as to what you’ll do. This can prevent you holding on to falling funds or stocks for too long and potentially losing more money than you were originally prepared to lose.
1Research conducted 3rd and 6th March 2020 among 2,004 UK adults aged 18+
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