The price of choosing emotions over discipline - September 25, 2019

The price of choosing emotions over discipline

The importance of self-discipline is not unknown for our readers, but how important is it exactly? JP Morgan has the exact numbers and they are clear. Poorly timed (probably emotion-based) decisions can hurt a lot.

We always say that emotion-based decisions are not good when investing. During market swings for example many decisions are motivated by fear, and that feeling is not the friend of the successful investor. We have numbers to prove it, too!

So, how much do feelings cost?

JP Morgan created a chart showing exactly how much bad investment decisions cost. They proved that between 1995 and 2014 investors could have lost $30 thousand with making some bad decisions.

How did they come to that conclusion? They looked at the 10 worst days of S&P500 trading; sharp falls, when many investors got scared and jumped out of the market. Usually, everyday investors don’t lead the pack either, but only react to selloffs, so they start quitting the market, when prices are already low. To make things worse, JP Morgan also found: “Six of the best 10 days occurred within two weeks of the 10 worst days”.

To show how serious this problem can be, the company started to compare this data to a 10-year-long fully invested scenario. JP Morgan found that if investors missed the 10 best days, they could only reach a 6.1% profit, instead of a 9.85% return. That’s a $33 thousand “loss” in case of a $10 thousand investment. That’s a serious amount, especially considering the initial investment.

In our post “Analysts are optimistic about stocks this year”, we also proved this phenomenon by looking at data from the beginning of the year. Last Christmas, negative emotions flooded the market, and many sold off their assets. They could have easily missed a double-digit growth a month later.

Discipline is the way to go

We can only repeat ourselves: a well-diversified portfolio and discipline is the way to go when investing. Why? Because as Business Insider puts it: “Most investors are terrible at trading — that is, they're not good at predicting short-term swings in the market.” (This is one of the main reasons why most people lose money on FX trading, as we covered it in our post here.)

Business Insider also explains the phenomenon: more “often than not, investors find themselves buying high and selling low. And when the market starts selling off sharply, investors will panic, sell their own shares, and sit on the sidelines”. They reenter the market when prices are high again.

The only remedy to this problem most of the times is to stay invested during fluctuations.

When to cash out, then?

Before every investment, we should make some things clear mainly for ourselves:

  • How much can you invest? (This is important, since you should only invest money that you don’t need in the foreseeable future, or for your everyday expenses.)
  • How long can you stay invested? (Most investment portfolios are created for at least 5-10 years; they perform the best on those terms.)
  • What is your goal? (How much do you want to earn and how much risk can you take for it?)


If you’ve made these decisions and found a well-diversified portfolio for it, you should leave it do its job. Especially if you have an actively managed portfolio with professional oversight. Jumping in and out of the investment based on your fears may hurt you, as we’ve seen from JP Morgan’s data.

So, when to cash out? When your preset time and goals are fulfilled. At least that’s what we advise, since we firmly believe that’s the average investor’s best chance to make a profit and not a loss.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.