How I feel has an impact on my returns.
When I read dreadful news about a certain stock or about the economy. I naturally get panicked.
I always overreact and feel compelled to liquidate my all holdings and sit on the cash. Refraining from taking any more risks.
Acting on my instincts all the time I may avoid certain losses but may also miss out on some gains.
I am trying to understand what fear is:
The simple definition is- it is a natural reaction to a perceived threat. Here, it's a threat to my profit potential.
Quantifying the fear might help. I understand what I am afraid of and why I am afraid of it. But this thinking should occur before the unpleasant news, not in the middle of it.
Fear and greed are the two visceral emotions to keep in control.
By thinking it through ahead of time, I know how I perceive events instinctively and react to them. Knowing my own reactions I can move past the emotional response.
This is difficult. But it's necessary to the health of an investor's portfolio, not to mention the investor.
Thankfully hedging instruments can avoid a lot of emotional reactions. I will write about it in the coming newsletters.