Investing and separating reason from emotions - How to manage emotions on red days

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I thought I’d create a general thread for investment psychology and tips on how to keep emotions, FOMO, and panic separate from investing.

After the bull run of the past year, red days are once again reminding us of their existence, and spring has awakened the bears from their slumber. The market is unstable, and this has also been reflected in my own portfolio, where YTD has already dropped into the red. In my case, the redness is exacerbated by larger purchases made earlier this year, which have unfortunately (at least with current information) hit the peaks. Of course, no one knows for sure yet which direction spring and summer will take the markets – hopefully, I can smile happily about this message a year from now.

I have considered myself a rational investor who sticks to an investment plan and knows that in 10 years at the latest, we will most likely be in profit. Nevertheless, I have noticed emotions, impulsive FOMO, and panic trying to override the voice of reason. No matter how much I remind myself that investing is a marathon, not a sprint, and that my portfolio mainly consists of stable performers like Harvia and Qt, there’s still a nagging feeling in the back of my mind that I should do something now. However, often taking action only worsens the situation, as market timing is notoriously difficult.

The situation has perhaps been further aggravated by my transition from index investing to stock picking – indices were nice because nothing could really be fine-tuned, and I didn’t follow the portfolio as diligently. With a stock portfolio, on the other hand, I often feel like tweaking positions too often, which traditionally leads to a dismal outcome.

The most common advice seems to be “don’t look at your portfolio,” but in my case, “uncertainty” even seems to worsen the situation. During last year’s COVID-19 dip, I consciously decided to “forget” the existence of my entire portfolio, which indeed prevented panic selling, but at the same time, I missed out on the gains of the latter part of the year with new purchases.

Do forum members have good tricks or the voice of experience on how to quiet panic and FOMO in one’s head and transition to zen-like rational investing?

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First and foremost, decide whether you’re focusing on the business or staring at the stock price.

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My own investment decisions have been based on business-driven selections, strongly relying on analysts’ target prices and reports. In my portfolio, I believe every stock has a “buy” or “add” stamp and solid fundamentals. Based on this, my faith in the chosen companies is, in principle, sufficient. However, companies like Kindred, where target prices are tens of percentages away and the stock continues to dive at a five percent daily rate, do sometimes put that faith to the test. At the same time, I wonder if I should cut my losses, buy more, or sit on my hands. This is precisely the mindset I’m trying to unlearn, as micromanaging a portfolio usually leads to poor outcomes.

Another fear lurking in the back of my mind is that a bear market will drag even good companies down into the abyss. We will certainly emerge from there at some point, but at this juncture, rational thinking and the exciting, tingling feeling of a dive in my gut don’t quite want to meet.

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The following works pretty well for me:

Only buy as many stocks as you can keep track of. For me, that means my portfolio has varying amounts of 6-9 stocks.

Each stock has been individually reviewed, so I can roughly estimate where things stand (at what prices to buy, when to potentially consider reducing holdings, where we’ll be in the next quarter, and in a year or two). This way, the surrounding noise doesn’t affect my decisions so negatively. The most important thing is to understand the company’s business; otherwise, it’s almost impossible to make rational decisions when the share price fluctuates.

Additionally, it’s good to remember not to strive for perfection; no one can consistently sell or buy at the best rise or fall.

Try to silence FOMO (Fear Of Missing Out) at the outset. When a situation arises where internal FOMO grows, start browsing the company’s reports, calculate, and think about whether they make any sense at all. These stocks come and go constantly; you don’t have to (and shouldn’t) jump on every single one.

I prefer to keep the size of an individual position at a maximum of 20%, and only temporarily and for a good reason at a maximum of 25%. If I feel that the fluctuation of a company I’ve assessed as good is getting to me psychologically, the weight is too large, and I will ruthlessly lighten my position until I feel good about it.

There’s probably more, but that’s a bit of a stream of thought for you.

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I have internally accepted volatility. It’s part of the game. It’s much harder to realize you’ve made a mistake and admit it.

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What works pretty well for me is that: When I buy, I know what I’m buying and why. So I’m buying a company, not share prices. I already have a view at the time of purchase on how long I will hold the shares in my portfolio. This means that some investments are truly in a long-term portfolio accumulating dividends, such as Sampo and Fortum. Then there are shorter-term investments YoY and QoQ, whose business and development I always evaluate from interim reports. If the company’s development and results are where I want them to be, I do nothing. SEYE is perhaps a good example of the latter.

Down days are part of the market cycle, and I have mentally accepted that. Why panic and sell in a hurry if the business in the companies I own hasn’t changed at all?

I’ve succumbed to FOMO a couple of times, and those are still in my portfolio as a lesson. There are always new targets for FOMO, and often you just get burned. A tip for dealing with FOMO could be to do your homework thoroughly. Even if you don’t get in today, potential losses will be smaller in the future when you know what you’re buying.

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This has worked for me: I aim for >10% annualized after-tax returns, which I have achieved with my diversified (growth/dividend) portfolio. Therefore, occasional tax-loss selling of losing positions is necessary.

When prices fall, I can give myself permission to rebalance my portfolio by making tax sales; but at the same time, I might also buy new companies/positions. This is how I acted during the COVID dip. Net-net, I managed to sell slightly more than I bought, meaning the overall risk level decreased slightly.

Despite this, I was able to establish strong growth company positions (Qt, Revenio) while reducing some underperformers. Looking back now, and from the perspective of total return, the shifts were quite successful. I stayed in the market at a risk level suitable for me.

I am also very precise about overall expenses, and I don’t let myself buy or sell too often or in small batches. This also calms the mind during market turbulence and forces careful consideration.

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In addition to these, I could introduce the Post-Mortem type of thinking that I myself practice.
So, what did the world look and feel like as an owner of EVO and Quut 3-5 years ago (neither was in my portfolio then)? Yes, the stock charts show such -20-30% windows, e.g., 140kr–>100kr or 6.5€–>4.9€; the reckoning came later for both, and it really wasn’t worth panicking.
This applies to, for example, Leijona now, and with this, one can feel better sucking their thumb now that the board shows quite grim percentages. You have to tolerate risk if you want to bag, it’s just not realistic to expect linear, explosive, continuous growth, even if last year offered it for many stocks.

Oh, and diversification in the portfolio must, of course, be in order (according to one’s own taste). If a 10% slice takes a -30% hit, it’s not such a terrible thing in absolute terms for very many people. For example, in a hundred-thousand portfolio, 3 grand. Is the world going to collapse because of that if you plan to hang around the markets for several decades?

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Don’t make hasty decisions in either direction. Not buying on an up day or selling on a down day helps with this.

Know your investing habits. Why did you buy, what are you aiming for? Get to know the market in general and try to mentally anticipate its movements and your own: for example, I last bought Kamux in March (before this, too expensively after the earnings report at over 15). The price fell as often happens and has now returned. I did nothing. I won’t do anything with QT, Efecte, Evo either. I’m still waiting for buying opportunities even until September, but I’ve decided how I’ll act and I’ll stick to it. Note! If there’s no negative news from the company. I’m ready to sell, even on a poor earnings report, if I feel the situation warrants it and I’m prepared for this.

You can also reflect on how you react to other life situations. The same psychology is at play, even if investing is different.

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If the entire stock market is strongly in the red and has been open for more than 15 minutes, then delete the “sell” button unless you are absolutely sure that there is a big, global reason for the drop that could pull the market down for days. You are probably already too late and will only curse a couple of days later about how you sold at the bottom.

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My portfolio is down -6% from its ATH, and it already feels like I’ve swallowed a cold stone. :see_no_evil_monkey:
I can only guess what it feels like when it hits -30%. :sweat_smile:

Maybe it would be a valid idea to sell off the portfolio and just set up some monthly savings ETF (himmeli) to run, and not even check the portfolio’s status more than a couple of times a year.

Now I’m wasting a hell of a lot of time reading all kinds of reports and so on, which I don’t understand half of anyway, so that would save me from that too. :thinking:

Well, we’ll see. This rant might just be one of those “down day blues.” :smirking_face:

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Here, everyone is learning to identify their emotions and why they act or think the way they do. The same idea applies to relationships. My board today is -6.08%, and it doesn’t bother me at all. I can’t influence these prices, so I’m not going to do anything.

If a plane makes strange noises in the air, I still can’t do anything other than what’s possible, which is to understand the situation and prepare for the worst. Usually, it’s not the end of the world.

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-Get your strategy in order.
-Don’t invest money that you plan to withdraw from your portfolio within 10 years (the longer the timeframe, the better).
-Buy & Hold, unless there are negative fundamental changes. Every dip is a discount.
-So, don’t just focus on today’s decline. It’s easier to tolerate volatility when things proceed according to your strategy, and you can’t influence others’ buy/sell decisions.

P.S. I won’t comment on speculation, trading, FOMO, etc… that’s your own strategy.

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I avoid emotional choices by only using strategies that have proven to work over a longer period:

  • Inderes model portfolio
  • Inderes buy-rated stocks
  • Redeye Toppicks
  • 1y/1m fund rotation

I can’t be bothered with fundamental analysis, and it would go wrong anyway.

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I can give you a Pirkka tip that you won’t find in Saario’s Stock Market Bibles. If a downturn stresses you out, make a slightly unorthodox decision and sell a small, struggling stock that has crept into your portfolio and in which you’ve lost faith anyway. It will only sting once. The other option is to buy a dip in a long position you believe in with a small amount of money, with the mentality that even if the fall continues, you bought a small slice cheaper than if you had bought yesterday. At best, you hit a price lower than the day’s closing price, and even if your portfolio is deeply in the red, you can think that this move was profitable. A couple of hundred euros invested in 10k-100k portfolios doesn’t really make a difference when commission fees are involved, but it can ease your mind. It’s always advised to sit on your hands, which, depending on the portfolio, might indeed be the best solution for it, but for some, this is mentally endlessly difficult. For many, doing something helps with this, creating a feeling of being at least a little in control of the situation. This can also help prevent you from making a much more harmful decision for your portfolio when stressed.

Edit. We are all different, and for some, investing is mentally very difficult, no matter what’s in the portfolio. If I remember correctly, Mikael Jungner, for example, once told in an interview on Yle that he sold his entire portfolio just before a broadcast. That was quite close to the worst bottom of the coronavirus, and he said he just didn’t dare to own anything anymore. I don’t remember what he owned then.

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Invest in the company’s business, not in stock prices. If you enter the market with the idea that you’re buying a stock only to sell it moments later at a higher price to the next fool, then you’re in dangerous waters. Don’t believe analysts. They predict all results by tens of percents wrong and weave their narrative to fit the current stock price. If analysts were right, they would be millionaires themselves and wouldn’t be writing reports all day long. The same applies to all other market comments. The price drops and a lightning-fast explanation comes that it’s supposedly due to some corona pessimism or something similar. If this is clear, why didn’t they say so in the morning? Speculating on the development of stock prices is a waste of time.

After buying stocks, you should have the feeling that even if the stock market were closed for 10 years, you would be happy with your purchase. This is how investors who invest in unlisted companies operate. In that situation, you are forced to look at the business. Staring at past transaction prices does not change the fundamentals of investing.

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Do you mean that Inderes’ analysts have falsified the historical data of their analyses? That the dates of the recommendations would be false? Because with those dates found in the historical data of the recommendations, one would have beaten the index if one invested in buy-rated stocks.

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I estimate the target prices of stocks a few years out using neutral historical key figures, and when the stock market fluctuates up and down, I can examine the future expected return. As the stock price falls, the expected return increases by the same amount as the value decreases today. When the stock market rises, if the expected return seems to turn towards zero, I reduce my holdings.

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Many analysts are millionaires, and often they have a reasonable grasp of the future. It’s up to the investor to do their homework: how to identify a potential analysis among the average ones and how to make their own adjustments to the conclusions of the analysis.

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Many good ideas and traditional investment advice have already appeared in the thread, but here are my own thoughts:

  • When I was young, I imagined I could identify bottoms and tops. The knowledge that my own abilities are not sufficient for this has made stock investing surprisingly easier.
  • Only companies for which I have formed my own opinion (note: not analysts’ or forum users’) on a target price and a price range where I am willing to add or reduce the stock are selected for my portfolio.
  • The number of companies in the portfolio is small, max 6-8, so that there is enough time for the above point.

The saying: “A calm sea does not make a skilled sailor” also applies to investing.

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