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Learn why managing emotions is crucial in investing, and how hiring a behavioural coach can help navigate financial decisions.

Investing is not just about analysing the market’s various scenarios on an Excel sheet and choosing appropriate investments to accumulate wealth. It also involves managing emotions relating to your investments. In this article, we discuss why emotions are crucial important for decision-making and why you need a behavioural coach to emotionally manage your investments.

The price we pay for letting our emotions dominate our investment decisions is called the behavioural gap. This refers to the difference between investor returns and investment returns; lower the returns you typically earn when actively buying and selling shares or switching from one fund to another compared with buy-and-hold returns on the investment. Why the difference? Anxiety can cause us to take profit quickly only to see the market continually move up thereafter. Regret could prompt us to switch from one fund to another only to see the fund we switched from outperform the one we switched into! It’s not easy to learn from our emotionally-driven mistakes.

This does not mean we can do better sans emotions. Neuroscientists have shown that we cannot make even simple decisions when the brain region ruling our emotions is impaired. Studies show how such brain-impaired patients can be irrational and risk-seeking because they cannot assess the risk associated with their decisions. While emotion is vital, important, letting emotions rule our investment decisions can lead to adverse consequences. What should you do?

You can keep your investment choices simple, buying ETFs or index funds for capital appreciation and investing in bank deposits for income returns. But you still need to manage emotions to manage investments through the time horizon for a life goal. So, you can hire an investment coach. An investment coach, unlike an investment advisor, will not help you make your investment choices but will help you become aware of your relationship with money and investments.

Not all of us have the time and inclination to self-manage money. So, you may be pressed to hire an investment advisor. The optimal solution in such cases would be to choose an advisor who also leans on behavioural aspects of investing. The goal is to improve financial wellbeing, not just just accumulate wealth with the related anxiety arising from market risk. Many investment advisors have long recognised the need to understand clients’ relationship with money. You should hire such an investment advisor — one also skillful at financial counselling, a financial therapist.

(The author offers training programmes for individuals to manage personal investments)