Emotional Investing & How To Avoid It

When investing in collectibles, or really any market, it can be easy to let emotions cloud your judgment. Most of us have fallen into this trap at least once in our investing careers. Prices are spiking, euphoria is at an all time high, and it feels like things are just going to keep getting better. We know we should sell, but for some reason we don’t. And then soon enough, the shoe drops, and the opportunity to sell in profit is gone. 

The fact of the matter is that all markets eventually become overbought and all time high prices can’t be sustained forever. Markets eventually have to correct to become healthy again. As investors we know this, so why is it that we still fall into the same trap over and over again?

It’s very common for people to become emotionally attached to their investments, and for many different reasons. Ego can play a huge role, as people often see their investment decisions as a reflection of their own intelligence. Essentially, their self esteem becomes tied to the outcome of their investments. 

People also become attached due to the significant time and mental effort put into the research, selection, and management of their investments. This expenditure of personal resources can lead to attachment. This is essentially Sunk Cost Fallacy in action. 

Social influence is one of the stickier attachments because you’re no longer just dealing with yourself. Groupthink is a powerful thing, and it becomes easy to just follow the crowd instead of doing your own critical thinking. There’s also a shame component where members of a group can make you feel bad for wanting to sell and you may even lose your social standing as a result.

I would argue that collectibles may even cause more emotional attachment than other markets due to the added layer of nostalgia associated with the IP. Nostalgia around collectibles brings us back to childhood. It reminds us of a simpler time when we felt safe. Nostalgia is incredibly powerful, and that feeling of safety can be extremely hard to give up. 

For someone who grew up with Spider-Man as their favorite character, it’s generally going to be harder for them to let go of their favorite Spidey collectible than some random stock or cryptocurrency. There are certainly other reasons for emotional investing, but I’ll stop there for now.

Now, how do we avoid letting emotion run our investments? The answer is simple, but often difficult to execute: make a plan and then stick to it. Before you even get into an investment, create an exit strategy. Decide what price levels you want to set stop losses and take profits at and then follow through no matter what. This allows you to trade with a cool head and completely remove emotion from the equation. 

Making sure your portfolio is properly diversified is also extremely important. Not only does this reduce your overall risk, but it makes it so you won’t be nearly as emotionally impacted by the performance of any single investment. In addition, employing automation tools that can execute trades based on pre-set criteria totally removes the emotional element from the situation. 

Another strategy for preventing emotion from running your investments is to buy multiples of something. Let’s say you buy a few identical collectibles. If the value goes up enough, you could sell one or two of them to get your initial investment back. Now there’s no longer any risk tied to the trade and you can either gamble on the value continuing to go up, or just keep the items for your collection. This obviously applies to fungible assets like stocks or cryptocurrencies as well. 

David Yu, CEO & Co-Founder of VeVe Digital Collectibles, has a similar strategy for collectibles which I love. Whenever possible, he buys three of the same collectible. One to sell, one to trade, and one to keep. This way he can be unemotional about selling or trading because he knows he’ll still have one for his personal collection no matter what. 

In conclusion, while it’s natural to become emotionally attached to our investments, especially in the world of collectibles, it’s crucial to maintain a disciplined approach. Do your best not to let things like temporary euphoria or social pressure dictate your actions and stay committed to your long-term strategy. By applying these principles, you can protect your investments and make more informed, objective decisions, ensuring that your financial goals remain on track regardless of market conditions.

Happy (unemotional) investing :)