10 Ways to Control Emotions While Investing

High-running emotions can quickly lead an investor astray. Both greed and elation can lure you into risky moves, while fear can paralyze decision making or encourage you to sell when you shouldn't. Unfortunately, you can't turn off your emotions or even ignore them effectively. What you can do is take steps to limit the number of emotionally driven decisions you make. These 10 tricks, ranging from making fewer decisions generally to having a go-to distraction plan, will help you do it.

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The simplest hack for controlling emotions while investing is to make fewer decisions. This approach is perfect for retirement investors and so-called lazy investors, who build their portfolios from three or four mutual funds. Choose your positions, add to them monthly with an automated contribution, and hold those same positions until they no longer suit your investment goals -- a timeline that's hopefully measured in decades. Rebalance once or twice a year to keep your asset allocation in check. And ride out any downturns, a necessity when you're relying on the market's long-term growth to build your wealth.

In this passive investment style, you're not making a lot of new decisions and you're actively overlooking the market's short-term volatility. That doesn't leave much room for your emotions to dictate your trading activity.

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If your approach doesn't allow for fewer decisions, try making smaller ones. Trade with hundreds of dollars instead of thousands, for example. Or, even better, have a process for phasing in new positions with small dollar amounts over time. You can also change the way you rebalance your portfolio. Instead of selling and buying all at once, rebalance gradually by adjusting how you invest new funds.

Committing to smaller, more gradual changes in your portfolio keeps you grounded. It encourages the mindset that investing successfully is about small wins, not big ones -- even if your gut sometimes tells you to double down or sell it all.

Define your investment process and then follow it meticulously. You might start by writing down your investment goals, timeline, and desired asset allocation for now and the future. Then document your research method and all of the characteristics you'd need to see for a position to be investable. Know how you'll track those characteristics over time and what changes would prompt you to sell. Also, decide how often you'll rebalance and whether you'll do it all at once or gradually.

Going forward, lean on your process to guide your decision making, regardless of market conditions or how you feel on a given day. If certain conditions are met, you buy. If those conditions are no longer met, you sell. Follow your own rules and you’re less likely to get attached to certain positions or trade based on hope or gut feel.

In this digital world, you have access to an abundance of information about the companies and funds you hold, market trends, and the state of economies around the world.

You can’t possibly take all the information in, nor should you try. Your financial process should dictate what information you consume and what you ignore. For example, if your plan is to ride out volatility in the short run, then there’s no point in diving into details that might convince you to deviate from that plan. Skip over the financial headlines and stop checking your portfolio balance. There’s no need to expose yourself to details that will stress you out if you already know what action you will take or not take.

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Being prepared to lose means you don’t need your invested funds for at least five years. That five-year window gives you the freedom to wait, calmly, for a downcycle to reverse itself -- rather than being forced to liquidate at a loss.

An unplanned realized loss is obviously not ideal from a wealth standpoint. But the real danger is that it might tempt you to make riskier moves going forward, to make up for lost ground. Head off that temptation entirely by having enough cash on hand to cover your expected liquidity needs for the next several years.

If you find yourself on a nonstop emotional roller coaster, you may need to reassess your expectations. Revisit why you're investing, what you hope to accomplish, and on what timeline.

To put things in perspective, the long-term average growth rate of the stock market is about 7%. If you invested in broad market index funds over long periods of time, a goal of 7% average returns is reasonable. But even then, you might see 30% gains one year and 20% losses the next. If your growth goal is more aggressive than 7%, you’ll have to take on more risk and volatility. There’s no way around that. You can either accept that you have a wild ride ahead, or adjust your expectations and your approach.

You can put a market slide into perspective pretty quickly by reading up on previous market cycles. The slowest recovery in recent history was in the early 2000s, after a period of speculation led to the dot-com crash. Shortly after, the Sept. 11 attacks delivered another economic blow. In that case, the S&P 500 didn't reverse its losses until the next decade, after the Great Recession. Even in that extreme, the market did eventually recover and convincingly so, with the longest bull run in history. That bull run created a lot of wealth for those who kept investing in the down years.

In the midst of a downturn, revisit the great crashes of history and the recoveries that followed. You might even crunch some numbers to see how you would have fared by buying in those downturns. It’ll be a good reminder that volatility isn’t entirely destructive -- it creates opportunity, too.

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A conversation with a like-minded investor can help diffuse uncertainty, disappointment, or frustration associated with your trading activity. Just make sure your first phone call is to someone who will listen and allow you the space to talk things out. You don't exactly need investment advice when you're ruminating about a decision that didn't go your way or uncertain about your next move in a dicey market. What you need is a two-way conversation that helps you take a more objective view of your situation. Use that objectivity to look forward and identify actionable takeaways as well as next steps.

Often, it's a quick reaction to news or market behavior that is most damaging to your portfolio. Those are the moments you feel the urge to make a big offensive or defensive move, when you really should do nothing at all.

To prevent yourself from having that knee-jerk reaction, learn how to recognize what's happening and then how to distract yourself. Get in the habit of pausing before you trade, to question if the move fits within your plan and follows the process you've outlined. If it doesn’t, log out of your investment account for the day (or even the month), and take a walk, read a book, meditate, or listen to relaxing music.

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You will make decisions that turn out badly. And market volatility will test your emotional resilience. Accept that these are outcomes of investing and be ready to move on from them quickly. You can spend some time learning from mistakes, but don't beat yourself up for what could have been done differently. That's not productive. Plus, it’s likely to raise the emotional component of any future decisions you make.

Admittedly, it's tough to reset mentally following a failure or series of failures. Go back to your process and your long-term goals. Get in the habit of looking forward so you’re less focused on the past.

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All investors have an emotional reaction to market swings and decisions that turn out differently than expected. You can't get rid of those emotions any more than you can eliminate market volatility. But you can implement practices that'll help you stay more levelheaded and process oriented, even when the market's going haywire. With a neutral mindset, you make better decisions and, very likely, more money, too.

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