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How to overcome emotional investing
IMPORTANT NOTICE: This article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.
At first glance, the key rules of investing may seem pretty simple to follow: buy low, sell high and diversify, diversify, diversify. However, in reality, success in investing can be difficult to achieve because of behavioral biases that we are all susceptible to as humans – or, simply put, because our emotions get in the way. In this blog, we take a look at how to overcome emotional investing.
For many people, the very idea of investing can seem scary and stressful. Moving assets from what tends to be perceived as a safe place, such as a bank account, into an investment strategy, makes many people nervous. Needless to say, it can be even more nerve-wracking to invest in digital assets – a nascent area of finance that is still perceived as volatile and higher risk by many. This is the first behavioral hurdle investors must overcome: don’t delay investing.
However, even once the first step has been taken, mistakes can easily be made. Even the most experienced investors are only human, after all, and humans are susceptible to behavioral biases. These emotional responses could result in a well-constructed investment strategy failing to achieve the desired results, or, at worst, losing money when it should be helping the investor accumulate wealth. Luckily, there are strategies investors can use to help them overcome these biases.
The first step to solving a problem, as they say, is recognizing there is one, and there are quite a number of behavioral biases out there. So much so, there is an entire branch of economics that is dedicated to studying them, called behavioral finance. All of these biases stem from our emotional responses to the stresses of investing.
This includes buying at the top of the market because there is hype around a particular asset, and panic selling when prices fall, despite knowing the old adage: buy low, sell high. This can be driven by confirmation bias, where the strong performance of an asset leads an investor to add to their holding in this asset, while our loss aversion bias compels us to avoid losses, even small ones, at all costs. It can certainly be scary to watch markets dip into the red during a bear market, but this is exactly the point when it’s important to stick to one’s guns.
Another common mistake is failing to diversify one’s portfolio, which is often linked to overconfidence in one’s own knowledge of a particular asset, leading to a belief that it will outperform. This overconfidence, as well as the natural human desire to act rather than remain idle, can also lead to trading too frequently. Perhaps an investor feels he or she is missing the best opportunities in the market by doing nothing. This frequent trading, however, can often lead to high transaction costs, which in turn erodes returns.
Dollar cost averaging
There are many other smaller biases we are susceptible to as humans, but those mentioned above are the most common, as they undermine the golden rules of investing: buy low, sell high, and diversify. Luckily, there are strategies investors can employ to conquer their emotions.
One way to take the emotion out of investing is to employ a dollar cost averaging strategy. In the simplest terms, dollar cost averaging is the practice of systematically investing equal amounts of money spaced out over equal time periods: for example, once a month or once a week. As we have shown in a previous blog (link below), this strategy allows an investor to smooth out the volatility of markets.
Crucially, it also takes the emotional element out of investing by setting a predetermined amount and time for each instalment. Dollar cost averaging can help investors avoid the trap of over-trading and escape the temptation of buying when the markets are booming and selling when assets are on their way down.
Out of sight – out of mind
In the world of digital assets, another way to mitigate this is by staking one’s assets into a portfolio or protocol for a period of time to remove the temptation to trade. For example, the Yield App Bitcoin portfolio is currently locked for a period of 90 days, having closed on Friday, October 15 after its latest round.
Being unable to access their assets over this time means those with holdings in the portfolio have little choice but to leave their earnings to compound. In addition, the annual interest rate of up to 12% available on the portfolio can help even the most nervous of customers sleep soundly at night knowing the volatility of Bitcoin is being mitigated to some extent through this holding. After all, the desired outcomes of digital asset strategies in the first place are often undermined by selling when the sentiment is at peak negativity, such as in a bear market, whereas remaining in a strategy that offers passive income can soften the volatility of such downturns until markets recover.
No drama with stablecoins
However, cryptocurrency prices do tend to be volatile, so putting all of one’s savings into a Bitcoin portfolio isn’t necessarily a good idea. It is always recommended to diversify across asset types and platforms to spread the risk, and never allocate money you cannot afford to lose. Yield App currently offers BTC, ETH, DAI, USDT and USDC portfolios, as well as attractive annual rates on our native token, YLD.
One way to diversify and add stability to a digital asset portfolio is through stablecoins. Stablecoins are digital currencies pegged to fiat currencies, such as USD Coin (USDC) and USD Tether (USDT), both of which are pegged to the US dollar. This makes them far less volatile than other digital assets. The lack of price volatility also removes any incentive to trade, allowing you to leave your assets allocated for the long-term to enjoy the magic of compounding interest.
At Yield App, users can earn up to 18% p.a. on their USDC and USDT portfolios simply by allocating to one of our strategies. The highest annual interest rate is available to users who stake or lock 20,000 YLD or more on our platform. This is also a great incentive to hold onto one’s YLD rather than trade it since the additional rewards from staking or locking the token are significant. This way, Yield App incentivizes its users to avoid over-trading and hold for the long-term, a strategy that can help ensure strong long-term passive income.
No one is immune to emotions when it comes to investing – we’re all only human. However, with these strategies in tow, it is easier identify the behavioral biases you are most susceptible to and learn to overcome your emotions investing in order to grow your wealth without the drama.