Circumvent ‘Hot Thinking’ When It Comes To Investments

Up and down of investment

A drop in the market due to the impact of COVID-19 has clearly been experienced. As such, many investors may be tempted to disinvest and wait until things stabilise. Humans tend to make emotionally charged decisions. However, when it comes to investing, hasty decision-making can have a long-term negative influence on investors’ portfolios.

The ability to block out short-term market noise can be vital to long-term investment success. Understandably, it may not be a stress-free task when the reality of a market downturn is negatively affecting investments. The fear and anxiety associated with perceived loss can lead to a compulsion to act illogically, but it’s important to try and suppress these ‘quick-fix’ emotions. 

Behavioural scientists characteristically call the type of thinking that happens under pressure ‘hot thinking’; it can lead to a defensive reaction. The issue has the potential to cause biased judgement and irrational decision making. Ultimately, it can be deduced that ‘hot thinking’ about your investment portfolio isn’t beneficial. It may seem counter-intuitive, but it’s during a crisis that important decisions should be made to fortify returns in the long term.

What can you do with disappointment, perceived loss and fear?

This may be the ideal time to cool off and consider adopting ‘cold thinking’; it can be defined as our ability to make rational decisions in a measured, controlled manner. There’s no doubt it can be tough to break away from natural emotional responses brought on by present financial conditions. There are numerous strategies that you can apply to assist in managing your thoughts. 

Here is an example of ‘hot thinking’ versus ‘cold thinking’

During times of stress fuelled by uncertainty, a ‘hot thinking’ response to market fluctuations may be ‘I’m worried about my children’s future, my parents, my income and job. I have to act right now. I can deal with effects later.’

Conversely, a cold thinking response may be ‘Have you taken the time to think about your finances from a holistic perspective?’ This can be a high-risk decision and affect your financial future. It’s recommended to take some time and think about your options critically. 

Based on the above scenarios, it can be seen that a ‘cold thinking’ approach should serve you best over the long term.

Where do we go from here?

At this point, no one (including investment managers) can definitely say what could happen next. COVID-19 infection cases are still increasing daily, which are more than likely to influence the market, resulting in a potential upsurge in ‘hot thinking’. Even though it’s difficult, it’s perhaps a good idea to remember that while the reality of these fears can be justified, ‘cold thinking’ can still be possible.

It may be useful to take a step back and with a level head, evaluate data from trustworthy sources. It’s likely that you’ll ultimately conclude that uncertainty will pass with time.  

If you’re feeling overwhelmed, you can speak to an independent financial adviser (IFA). He/she can provide you with an objective outlook of how to deal with emotions during times of personal and financial insecurity.