A 12 Step Program for Emotional Investors

Are you an emotional investor? C'mon, be honest with yourself. If you are human then you are probably an emotional investor. And this is a problem for your portfolio. The first step towards recovery is admitting you have a problem.

The American Association of Individual Investors (AAII) came out with their 12 Step Program to Remove Emotions from your Investment Process.  The author, Thomas Howard, sums it up pretty well for you:

“Beyond presenting specific techniques, I also discussed ways to remove emotions from a decision process. Now that I manage money professionally and have delved into the ever-growing body of behavioral science research, I am more convinced than ever that ruthlessly driving emotions from stock-picking decisions is essential to generating superior returns. In fact, if you don’t, you cannot outperform.”

You may not even realize it but there are certain cognitive biases that are killing your portfolio. The confirmation bias, for example, makes you seek out information that supports your investment decision. Buying a stock and then looking at only positive news and commentary about that stock. Or maybe the gambler's fallacy which makes you put more weight on past information. Just because you lost 4 hands of blackjack in a row does not mean you have a better chance of winning the next hand. Just because gold stocks were up for 3 years in a row does not mean they will continue for the next 3.

You can master your emotions by going through these twelve steps. Another great way to master your emotions is to have a financial plan in place. That way when you start getting emotional you just look back at your plan, stay the course, and be confident you'll be ok. Here are the 12 steps to recovery:

For more reading on this topic you can check out the Stock Market Cycle Emotions chart and the Behavior Gap article that I posted earlier. You can also read the full AAII article here which goes into more detail on each of these steps.

Have you noticed emotions affecting your investment performance? Share it below in the comments section.

A special thanks to the Phillip James Client who passed this article onto me.