Why emotional investing can lead to mistakes

3 September 2020
One thing I’ve learnt over almost three decades of trading the stock market is that when individuals invest their hard-earned money, they never expect to lose. While on an intellectual level they know it is possible to lose money, they just don’t think it will happen to them. This false reality unfortunately means investors tend to make emotional decisions when investing their money, which leads to mistakes when managing their portfolio.

When you invest with a mindset of not losing, you expose yourself to higher risks, which in turn results in one of two issues. The first is you achieve poor portfolio returns and secondly, it increases your stress levels, as you watch your stocks fall in price and your portfolio devalue. Indeed, watching your investments fall without taking the necessary action to exit is the difference between a comfortable, early retirement and working until pension age or, in some cases, longer.

Over the years, I have reviewed many portfolios and the one thing that remains constant is that the majority of investors are ignorant about the reality of what investing their hard-earned money really means. A motto that I continually drum into my clients when it comes to profitable investing is what you do not lose determines how much you make.

While this is overly simplistic, once you learn the rules about how to find good investments and you are able to manage them with the knowledge and confidence of knowing when to exit, your risk and stress levels will decrease and you will profit more. While it is inevitable that some stocks will fall in value after you purchase them, the reality is that to achieve better than average returns with your portfolio, you need to concentrate on assets that are rising in value and increasing your wealth, and sell assets that are falling away.

I explain more in this video.

So what are the best and worst performing sectors this week?

The All Ordinaries Index continues to promise more than it delivers given that, once again, some sectors have risen strongly while others have fallen heavily. The best performing sectors include Information Technology with a strong rise up over 5% while Consumer Discretionary is up over 2% followed by Industrials up around 1%. The worst performing sectors include Utilities down over 4% followed by Energy down over 2% and Healthcare, which is currently down just over 1%.

Looking at the ASX top 100 stocks, the best performer so far this week include Reliance Worldwide up over 31% after posting a solid report, although, in my opinion, the results do not justify the rise. Next up is Cleanaway Waste Management up over 13% followed by Worley Limited up over 8%.

The worst performers include Whitehaven Coal down over 27% after announcing a big slump in profits earlier this week. APA Group and Aurizon Holdings are also both down over 6% followed by Treasury Wines Estates, Crown Resorts, The Star Entertainment Group and Ampol, which are all down over 5% so far this week.

So what’s next for the Australian share market?

To understand the Australian stock market right now, we need to look at what has happened over the past few months. When COVID-19 hit, world markets fell heavily in the fastest technical bear market we have seen in history, which resulted in the All Ordinaries Index falling 39% in 22 trading days. From the low on 23 March, the Australian market rose 42% over 53 trading days to a high of 6,314 points before falling away over 4 days and around 7%. Over the past 53 days, the market has only risen 8% to of high of 6,310 points so far this week. In short, without meaning to be repetitive, the Australian market is going nowhere.

One thing I know for sure is that if confidence is high, price rises strongly for a significant time but when fear rules, prices fall heavily. Right now, confidence is low, as we are constantly hearing news about the uncertainty of world economies and our future, so indecision is ruling. While the market will pick a direction soon, unless we can get more certainty and confidence, it is more likely that the direction will be down in the short term.

For now good luck and good trading.

If you’re comparing Online Share Trading companies, the comparison table below displays some of the companies available on Canstar’s database with links to the company’s website. The information displayed is based on an average of 6 trades per month. Please note the table is sorted by Star Rating (highest to lowest) followed by provider name (alphabetical). Use Canstar’s Online Share Trading comparison selector to view a wider range of Online Share Trading companies.

Dale GillhamAbout Dale Gillham 

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice.

Follow him on LinkedIn.




This article was reviewed by our Content Producer Isabella Shoard before it was published as part of our fact-checking process.

Share this article