🎙 Emotional investing…speculation…market sentiment… these are all the things that drive the stock market. Which means that they determine what happens to your wealth, even when you have a solid and well-researched investing strategy. So, how do these forces actually work, and how can you protect your wealth against them? 🤔
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Hello, friends! And welcome back to Girl on FIRE, the financial independence podcast for independent women.
My name is Priya, I’m a Chartered Accountant, an analyst and the creator of Paper Money Co.
I’m also a fierce financial feminist and the host of this podcast. I believe that a woman who is in control of her money, is in control of her life.
This week we’re talking about what makes the stock market tick. Particularly when it comes to market or investor sentiment.
I talk about investor sentiment a lot on this show, especially when we talk about how stock prices move up and down.
So, today, we’re going to talk about what that means in a lot more detail.
Because here’s the thing: the market is like a flock of seagulls. And they’re always chasing after those crispy hot chips.
This is one of the factors that makes the market unpredictable. And you as an intelligent investor and a Girl on FIRE, need to know how the market reacts under certain circumstances and what that means for your investments.
Now, I want to be super clear about something here. I know that there are some men all over the internet — some, not all — who think only women are emotional investors because we have no control over our emotions.
So, I’m just going to say right now that that’s not true. Emotional investing impacts everyone, regardless of age, gender or anything else.
Unless you’re a robot or some kind of sociopath.
But before we get started, I promised you last week that I was going to let you in on a little secret.
I’m going to be hosting a masterclass in July where I share my 3 Insider Secrets to Financial Success.
I’m going to let you in on how you can budget your way to 6-figures like a pro, just like I did, without giving up your latte and all the things you love.
It’s totally free, you just need to register so I can send you the link to join. And also so that I know you’re coming.
Trust me, I would put out some coffee and croissants for you if I could.
I’d love to see you there, so head to papermoneyco.com/masterclass to get registered.
And to be honest, I could also use some moral support from my Girls on FIRE. This is the first masterclass I’ve hosted and I’m a little terrified.
But in this masterclass I’m going to walk you through the 3 biggest secrets that have shaped the way I budget.
You know that I’m all about getting the basics right first, so that’s what I’m going to cover in this masterclass.
These are things that I figured out through years of trial, error and tears. And they’re things that have formed the basis of how I budget and the money management that I teach.
So, I would love it if you would come along, even if it’s just for moral support because Priya has no idea what she’s doing. The link to register once again is papermoneyco.com/masterclass.
As I’ve said in many episodes a this point, the sooner you can get your foundation set and get those good money management practices in place, the sooner you can start investing and building your wealth.
And this masterclass will help you build a super strong foundation, so you don’t want to miss out.
As always, Girl on FIRE is about learning, so whip out your favourite notebook or journal and get ready to take some notes.
If you’re not into writing things out by hand, you can always find the transcript on my website — papermoneyco.com/gof27.
Okay, let’s dive in and talk emotional investing!
What is emotional investing
First up, what is emotional investing or impulse investing?
So, think about how you spend money. Most of us are prone to either impulse spending or we spend when we’re stressed or we spend when we’re happy and we want to reward ourselves.
And there’s nothing wrong with any of that. It’s just how our brains are wired. But just like we can be emotional spenders, we can also be emotional investors.
And when it comes to investing, we’re ruled by one of two main emotions: either fear or greed.
How emotional investing feeds market sentiment and speculation
Emotional investing happens when an investors’ emotions overpowers their ability to make rational investment choices.
It’s really common among beginner investors, but it can happen to all investors at some point or another.
Now, emotional investing is what happens when one person makes decisions based on their emotions.
And individual investors collectively form the market. Because those investors are the buyers and sellers on the stock exchange.
Market sentiment is the general sentiment across the whole stock market, so that’s all investors.
It’s how the market as a whole is feeling about individual companies, economic conditions, sociopolitical factors, the weather, anything.
They’re either optimistic or pessimistic. And that’s often referred to as being either bullish or bearish.
And to take that a step further, the market is also rife with speculation. Speculation is just that — speculating.
It’s how investors feel about prospects in the market. It’s guessing or judging what’s going to happen.
And it’s often as scientific as tarot card readings or placing crystals around your computer in a circle when you log into your brokerage account.
So, those are the three things you need to take away from this episode, and they’re all related to each other: emotional investing, market sentiment and speculation.
You’ll see throughout the rest of this episode how those forces of dark magic interact with each other.
How does emotional investing impact your wealth
So, moving on, let’s look at a couple of examples. Let’s look at how emotional investing can impact you as an individual investor.
Emotional investing: making decisions out of fear
Imagine that you’re invested in the stock market and it’s March 2020. The COVID market crash happens.
The market is starting to go down and you’re seeing your portfolio lose value. You panic. You don’t want to lose all the gains you’ve made.
You decide that it’s better to cut your losses and get out now before you lose it all. So you sell all your holdings.
But the problem with doing this is that you don’t know when the market hits bottom.
No one does, and you’ll see why in this episode — because the bottom and the peaks are really defined by market sentiment and speculation.
And if you don’t know where the bottom is until you’ve bounced back from it, then you also don’t know when the market it on it’s way up again until it’s already happened.
And you’re already scared of losing money. So you wait to enter the market again. You keep your money in savings until it looks like the crash is over.
But by the time you enter the market again, it’s already risen 20%. You just missed out on those gains. Because you pulled your money out instead of letting it ride the wave on the way down and back up again.
Emotional investing: making decisions out of greed
What about making investing decisions out of greed? Just look at something like Dogecoin or whatever the hell they’ve come up with now.
People hype it up. And that hype causes the price to rise as people start buying Dogecoin.
And as the price goes up, you start to hear stories of people making a ton of money on Dogecoin. And you don’t want to miss out.
So, you invest in Dogecoin, too. You’re making your decision based on what the markets’ collective greed has done to the price of Dogecoin.
You’re not sitting there analysing it’s performance and whether it’s a sustainable investment. You just want to make some money quickly, like everyone else.
You want a piece of that 500% return that some guy on the internet boasts about.
Or, what about when Elon Musk picks another stonk to invest in? Some people think, well if Elon Musk invests in it then it must be good. I want to be as rich as Elon Musk.
So, they invest in it, too. And their decision isn’t based on any rational analysis or research. It’s based on “my investing strategy is to get rich. Elon Musk is rich so, I’ll invest like him”.
How does investor sentiment & speculation impact the stock market
Market sentiment and speculation
Now, let’s look at a really good recent example of how emotional investing can change market sentiment and what happens when all that speculation runs rampant.
You may have seen a news article about Coke recently. Their star boy Cristiano Ronaldo was doing a press conference and he had bottles of Coke sitting in front of him, because they sponsor him.
He pushed those bottles out of the way and picked up a water instead. Never mind the fact that Coke helped him get rich enough to maintain the new face he bought for himself.
He’s all about choosing to promote the healthier option now. And all of a sudden people freak out. They think Coke is dying because one soccer player drank a bottle of water instead of a bottle of coke.
I would guess that Coke probably owns that brand of bottled water, too. That’s why it was on the table in front of him with the Coke bottles.
But the market doesn’t care. You have to remember that the market is really just a collection of investors. It’s all just a bunch of humans with their emotions.
With their fear mongering and greed. Their woe-is-me moments and fainting on fainting couches when the market moves an inch.
And all these investors think that Ronaldo drinking water is a harbinger of doom for Coke. They start selling off their investments because the end is nigh.
And what does that do? It increases supply of Coke stock on the market. And even investors who don’t know what Ronaldo did see that people are selling their Coke stocks.
They panic and sell theirs too. All these people selling their stock can’t be wrong, right?
And it starts to snowball. Supply of Coke stock increases just as demand for it starts to fall. And the price starts to go down.
And it keeps going until news outlets are reporting that Ronaldo was responsible for wiping $4bn off Coke’s market value.
Now, was this a real disaster that Ronaldo caused? No. Not everyone on the planet drinks Coke because they sponsor Ronaldo.
Coke is a very well established company. And the truth is that a couple of reporters broke a story about Ronaldo snubbing coke and planted a seed of fear and doubt into the minds of countless investors.
Those investors then make choices out of fear. This is manufactured-by-the-media fear. And those choices cause the stock price of a well managed and profitable company to drop.
Another famous example from the last few years, was when Apple first unveiled face ID for the new home buttonless iPhone 10.
The stage device wasn’t set up properly before the presentation, so when Craig Federighi tried to demonstrate face unlock live on stage, the feature failed.
And for a few minutes the stock market lost its mind. Within seconds of the onstage fumble Apple stock took a sharp nosedive, but with Apple being Apple, the stock price recovered within the hour.
Some people made videos on YouTube that have that segment of the presentation and a live stock ticker from the same time side-by-side, and you can see the price fall and then slowly start to rise back up throughout the presentation.
So why did this weird and sudden fluctuation in the price happen? Emotional investing happened. When investors saw Apple’s new landmark security feature fail live on stage they got a pang of panic.
They saw doom and gloom ahead for their poster child of innovation and technology and they feared that this stumble meant the beginning of the end.
They saw a crash coming and if they didn’t get out now they would only lose more money in the future.
What evidence did they have that this crash was coming? The truth is they only had their emotions and their snap judgements. I’m sure there are some of you listening now that don’t even realise that story happened.
More importantly, that crash that all these investors were so sure of never came.
But this is just another example of how market sentiment can have sudden and sizeable effects on some of the most stable and profitable companies. And honestly, it’s sometimes for stupid and meaningless reasons. Remember, seagulls chasing chips.
How speculation is fuelled by the media
You can see from that example that the stock market is very heavily influenced by investor sentiment and speculation. How investors feel and what they think is going to happen.
It doesn’t matter whether those feelings and speculations are based on anything real or substantial.
The prices in the stock market aren’t dependent on a company’s actual performance or their actual prospects.
It’s all based on how investors think the company is performing. And how they feel about the company’s future prospects.
And that sentiment and speculation is in turn driven by the media, both traditional media and social media.
So much of it comes from word of mouth or rumours or news outlets trying to sell subscriptions by warning us of impending doom.
It’s sensationalist news. But it has a real impact on what happens in the stock market. And that means it has a real impact on what happens to your personal wealth.
That’s why it’s so important for you to understand emotional investing. It’s not just so that you can make decisions without emotion.
But so that you can understand what happens to your wealth when other investors make decisions out of emotion.
FIRE & investment calculator spreadsheet
But before we move on, I want to ask my Girls on FIRE for a favour. If you’ve listened this far into the episode then you’re probably enjoying it, right?
So, here’s what I’d like you to do next. Pause this episode for a few seconds and head on over to papermoneyco.com/podcastreview.
I want you to leave a rating and review for Girl on FIRE because it helps me provide better content based on what you’re enjoying the most.
It helps other women out in the internet wilderness come and find us as well.
And it’s also a great way to support this show for free, and for that I’d love to send you a little something to say thank you.
If you do that, I’ll send you a copy of my FIRE and investment calculator. Which, if I do say so myself, is pretty damn amazing.
It’s how I plan for my early retirement and my wealth. It shows me how my wealth is going to grow, when I can retire and how long my money will last.
And it also has a separate tab that takes Australia’s superannuation into account as well.
And you can use it to analyse companies and different investment options when you’re picking stocks too.
I’ve never actually seen anything like it before, so it’s pretty special. And I’m currently not offering that spreadsheet anywhere else except on my Patreon.
Not in my shop, not to my email list — it’s a ghost. So, this is kind of a money-can’t-buy type deal.
The only way to get your hot little hands on that spreadsheet is by submitting a rating and a review, taking a screenshot and tagging me in it.
That URL again is papermoneyco.com/podcastreview. I’ve made it nice and easy for you.
So, go hit pause and do that right now. It’s okay, I’ll wait.
Okay, that concludes my little ad-break, so let’s get back to it.
How does emotional investing impact your wealth
So, how does emotional investing, market sentiment and speculation impact your wealth?
It can impact you either directly or indirectly. So, what do I mean by that?
You’re directly impacted by things like emotional investing when you’re an emotional investor.
When your investment decisions — which you have full control over — are dictated by your emotions, whether that’s greed or fear.
So, for example, when the market tanks and you panic and sell everything to avoid losing all your gains. That’s emotional investing.
You’re trying to pull out before it hits bottom which means you’re also hoping to jump back in on the way back up before it hits the peak.
That’s trying to time the market. And we talked about that last week when we were looking at the difference between long term investing and day trading.
This is the #1 reason why day trading doesn’t work. Because the majority of people who try to get rich quick by day trading succumb to their emotions.
They make decisions out of greed or fear to try and time the market and it just doesn’t work.
A market that is so heavily driven and influenced by the emotions and speculation of investors and the media is unpredictable.
And it’s extremely difficult to time something that’s unpredictable.
Another way you’re directly impacted by emotional investing and speculation is when you see someone post something on Twitter or Instagram about investing in ABC stocks and making bank.
You don’t want to miss out and it sounds like a good idea, so you invest in ABC stocks too, without doing any research or analysis.
Also, your decision to keep your money in savings instead of investing it is also directly impacting your wealth.
Because you’re making a decision out of fear. And that decision means your money is being eroded by inflation and you’re not growing your wealth.
And that’s the boat that I was in. Despite studying economies and stock markets for years, I was terrified of losing all my money.
And that fear kept me out of the stock market for a long time.
But emotional investing, market sentiment and speculation can also impact your wealth indirectly.
And what I mean by that is that it can impact your wealth when someone else makes decisions.
You can do everything right. You can do all the right research and analysis. You can formulate a great investing strategy and follow it without falling into the emotional investing trap.
You can ignore all the crap on the internet telling you how to make 500% returns in 30 days. You can do everything right but you don’t control the entire stock market.
For every intelligent investor, for every Girl on FIRE, there are thousands of investors who are just seagulls. They’ll follow that chip off the edge of a cliff.
And you can’t control that. You can’t control the media going crazy wondering what Ronaldo drinking water instead of Coke means.
And you can’t control the way thousands of investors will react to that. But it still impacts your wealth.
If you’re invested in Coke, then you would have seen a drop in your portfolio value over that quote / unquote incident.
All you can do when things like that happen is just ride it out. And make sure that you’re well diversified so that this kind of volatility doesn’t impact you as much.
Ways to beat emotional investing
Okay, so now that we’ve gone over emotional investing and how it impacts market sentiment, let’s talk about how to overcome it. How do you beat emotional investing?
Now, as I just said, you can only control you. So, there’s not much you can do about the flock of seagulls chasing all the hot new stonks.
But here are some things you can do to protect your wealth. We’ll start with a couple of ways to build that protection into your investing strategy.
Dollar cost averaging
First up, you can try dollar cost averaging which is a strategy we talked about in Episode 24.
It means that you’ll commit to making a regular investment of the same amount, in the same asset at regular intervals.
No matter what the market is doing or what the price is, you’re going to make that investment.
And by doing that, your emotions don’t matter. Market sentiment and speculation don’t matter. You’re making that investment no matter what.
Another way to protect yourself is to make sure you’re well diversified. When your eggs are spread out across multiple baskets, it doesn’t matter so much if the seagulls get into one basket.
The other baskets are still okay. But if you keep all your eggs in one basket, meaning, you aren’t diversified, then the seagulls can destroy your wealth.
You’ll be totally at the whim of market sentiment and speculation. Imagine if your entire portfolio was invested in Coke. You could have lost a substantial part of your wealth in one day. Over nothing.
But when you diversify, you’re spreading the risk around. So when the market goes crazy in one area, you’re protected by your other investments.
This is one of the reasons why ETFs are a great option. We talked about ETFs in Episode 17. In one trade, you can be diversified across hundreds of companies.
Do your research and understand what you’re investing in
It’s also super important to continue investing in your own education. Learn more about the market and how it works. Learn about how the economy works.
Research investment opportunities and analyse them according to your investing strategy. Are they good enough or should you look for something else?
And most importantly: never invest in something that you don’t 100% understand. You need to understand how it works, what the risks are, how you make money and when you’ll lose money.
It’s super important that you keep learning. Learning never stops. And if you can teach your friends as well, that’s even better. The more that people learn, the less likely they are to behave like seagulls.
You can also automate your contributions to your investment accounts. This will be a lot like following a dollar cost averaging strategy.
But if you automate your contributions, you don’t even need to make the transfer yourself. It’ll all happen automatically.
Hire a financial advisor
And the last tip I have is that you can hire a financial advisor to do it all for you. There’s nothing wrong with hiring a good financial advisor, and in a future episode, we’ll talk about how to actually find a one.
But I strongly recommend that you still commit to learning everything you can about investing and what your money is doing in the hands of your advisor.
Hiring an advisor doesn’t free you from your responsibility to know what you’re investing in and understand all the risks.
And having all that knowledge helps you keep your advisor accountable. It allows you to question their decisions.
And it allows you to advocate for your best interests. Because let me tell you something. Yes, a fiduciary is legally bound to act in your best interests.
But no one on this planet, will advocate for your best interests the way that you can. You have to fight for you, that responsibility doesn’t lie with anyone else.
Because the moment you hand that power over to someone else and wash your hands of it, is the moment you give away control.
It’s the moment you let someone else control what your retirement will look like and what kind of lifestyle you’ll have.
And Girl on FIRE is about taking control, not giving it away. So, the more you learn the better. Whether you’re managing your money on your own or hiring an advisor.
Next weeks’ episode
And that’s all I have for you Girls on FIRE today!
My challenge for you this week is to head to papermoneyco.com/masterclass and register for my free masterclass where I teach you my insider secrets to financial success.
I get asked how I managed to pay off debt and grow my net worth to over 6-figures on a modest salary, and this is how. I’m sharing the secrets!
I really hope to see you there, it’s totally free.
And the sooner you can get your foundation set and get those good money management practices in place, the sooner you can start investing and building your wealth.
On next weeks’ episode I have a special guest!
It’s going to be a super fun episode so you’re definitely not going to want to miss it.