Taking the emotion out of investing in an environment plagued with socioeconomic challenges such as the ones South Africa is facing right now may seem like an impossible task for most. 

Times of uncertainty and financial downturn may see you either make bad investment decisions in the hope of high returns or have you stay out of the market all together. 

“The two dominant emotions are fear and greed. Generally, investors are preoccupied with not wanting to lose money and with making as much as possible in returns,” Gugu Sidaki, director and wealth manager at Wealth Creed, explained at the recent Leaderx Conference. 

Hardi Swart, managing director at Autus Private Clients, says that although finance theories are built around traditional economic models that assumed that humans are entirely rational all the time, it is simply not true. 

“We know that markets do not react rationally and are driven predominantly by emotions, whether positive like hope and euphoria or negative like greed and anxiety,” he says. 

According to Sidaki, the best way to manage your emotions is to firstly understand what they could possibly be. 

“A risk profile is one of the best indicators of potential emotion and behaviour and will give you insights into your fears and needs. It also provides an indication of how to behave in certain market conditions,” Sidaki explains.

According to Swart your risk profile will be determined by how much time you have to invest, your financial position and overall wealth, reason for investing and other personal circumstances, such as your health and family situation. This helps determine your overall emotional standpoint when it comes to investing. 

He says the main negative emotions around investing include anxiety, fear, impatience, panic and greed, while the positive emotions include enthusiasm, excitement, hope and euphoria. 

“These emotions are then managed through asset allocation, which is the inclusion of appropriate asset classes, such as equities, bonds, property and cash in your portfolio in the right proportion to help you meet your goals while assuming a manageable level of risk,” Sidaki says. 

Laura Warburton, wealth manager at Integral Wealth Management, says it then becomes clear that asset allocation may be more important than diversification when it comes to your investments as it addresses the various levels of risk and emotional rollercoasters. 

Swart says it is a good idea to not follow people blindly, because everyone’s  investment decisions are based on very different emotion and risk indicators than yours. He gives the example of bitcoin and the buzz created around it when some people became millionaires overnight. 

“Most people wanted a piece of the pie, but many were too late. The people who gained, did so because they bought in low and sold when the prices were at all-time highs. The herd is not always wrong, but there needs to be a degree of rationality,” he warns. 

Warburton says you should go back to the basic principle of how you manage your daily and monthly budget before even getting yourself on the investment ride. 

She adds that having a financial planner or adviser will help you eliminate emotional behaviour when investing as they must do annual ‘financial check-ups’ to ensure your overall financial wellbeing is in good condition.

The experts agree that not getting swayed by fake news is also an important strategy to protecting your investments and staying the course. When you react to the news easily, you are more likely to make emotional investment decisions that could be detrimental to your investments.

Sidaki says that if you see yourself staying in South Africa for the foreseeable future, you cannot avoid participating in the market for a long, drawn-out period of time. 

You should adopt investing and staying in the market over the long-term as a strategy, regardless of market conditions, she says.

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