The stock market specializes in inflicting emotional turmoil. It tests your ability to withstand financial pain, trying to shake you out of a bull market well in advance of its eventual peak and rallying just enough in a bear market to convince you that the worst has passed (and to retain your positions) before plunging further. And with increased volatility compressing moves that used to take years into months, and moves that used to take months into weeks, it’s no wonder that investors’ emotions are becoming more easily frayed in the global, nonstop trading environment we’re experiencing.
Preparing for financial battle involves not just having capital to invest, an investment discipline to help guide you, and a risk management view on your holdings, but also knowing how you’ll react to potentially sudden, sometimes violent market swings that can last for weeks on end with your hard-earned capital on the line. Your answers to the following questions will help define your emotional investment profile:
- What are the limits of your tolerance for financial risk and monetary pain? Do you set boundaries?
- Do you have more than enough money in reserve in case something totally unexpected occurs? Are you a sound financial planner?
- Are you able to effectively process the information necessary to make a sensible investment decision in tumultuous times, or do you tend to remain passive and not face the situation?
- Are you able to go to sleep without waking up in the middle of the night to obsess about what the next day holds?
- Are you a nervous, patient, or complacent individual?
- Are you the type of investor who buys a large position in a stock with a tight “stop” (risk tolerance point), or the kind who purchases a smaller equity position with a looser “stop”?
- Do you have the patience to hold a stock that’s performing satisfactorily, or are you more apt to trade shorter term?
- Do you find it hard to take a contrary investment view when the prevailing market sentiment is overwhelmingly aligned against you but your analysis is saying otherwise? Does crowd psychology affect your thinking and decision-making?
- Can you take a loss or multiple losses in stride as part of the investment process? Can you admit mistakes and not make excuses?
- Are you flexible or stubborn?
- Do the market’s movements affect your mood and temperament? Are they affecting how you act outside of market trading hours? Are they infiltrating your relationships with family and friends?
- Can you act once an investment decision has been made, or do you tend to freeze up and second-guess yourself by being overly analytical?
- Are you an investment optimist, preferring to look at a best-case investment scenario, or do you prefer to look at a worse or worst-case outcome?
