Why emotion is key to becoming a wealthy ASX shares investor: Experts

Emotions can drive market momentum and influence personal share trading decisions, say these experts.

emotional person clasping chest while at a computer

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Market sentiment is often discussed as a reason for broad market gains or losses in a given trading day.

While there are many measurable financial factors that feed into sentiment, such as economic growth, there are also softer factors like human emotions, and we can't always count on them being rational!

In an article published on the ASX, two experts discuss how emotion plays into ASX shares investing.

How emotion drives the market

Karl Siegling, chief investment officer of listed investment company (LIC) Cadence Capital, says human emotions such as hope, fear, and greed can determine whether ASX shares become cheap or expensive.

He says:

The collective emotions of individuals, which is 'the market', play an extremely important role in investing.

The sooner that investors understand how important emotion is, and how likely we are as individuals to make decisions based on emotion, the sooner they will become better investors.

After a lifetime of investing, Siegling says it's "a myth" that stock prices are based purely on value, saying:

Investors are always told to 'buy low and sell high'.

So, we study finance or accounting at university and learn different techniques to value companies.

There's this myth that all we need to do is learn the correct formula to value companies and we can lead a rich, healthy and wealthy life.

ASX shares investors need to understand that industry cycles can take years to play out. This means they could be waiting for a long time to see substantial price gains.

In the movies, everything in the share market happens very quickly. In real life, when you buy a share, you are buying part of a company.

Companies move much slower than people realise. When a business starts improving, that improvement can play out over many years.

It sometimes takes years for a stock to go from being unloved to being loved.

How emotion influences ASX shares trading decisions

Felicity Thomas, a senior private wealth advisor at Shaw and Partners, says emotion can drive rash investment decisions.

For example, the fear of missing out (FOMO) can prompt people to buy ASX shares that are rapidly rising instead of buying them based on fundamental analysis.

She says:

Emotional investing often leads to poor investment decisions, like buying shares during euphoric phases [for the market] and selling low during panic phases.

A lot of investors want quick wins but it is important to maintain a long-term perspective.

Despite short-term volatility, history has shown that the share market tends to grow over time.

Thomas says patience and a disciplined approach can help ASX shares investors stick to their investment plans.

As a young investor, Thomas only invested money she did not need for living expenses.

She also kept some cash on the sidelines.

There are pros and cons to keeping some cash in your investment portfolio.

Today's high interest rates mean cash is certainly earning better returns than in previous years. However, inflation — which erodes the buying power of cash — also remains high.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
Share Market News

Buy these excellent ASX dividend shares for 5%+ yields

Analysts expect above-average dividend yields from these shares.

Read more »

Two miners examine things they have taken out the ground.
Broker Notes

Up 64% this year! What's Macquarie's price target for Lynas Rare Earths shares?

Clouds on the horizon?

Read more »

Man ponders a receipt as he looks at his laptop.
Opinions

3 reasons why the Xero share price could be a strong buy

This stock has all the hallmarks of a long-term winner.

Read more »

a group of people in business attire gather around a computer in an office environment with expressions of concern as they try to nut out the answer to a challenge they are facing.
Broker Notes

Leading broker just downgraded the Fortescue share price. Is it time to sell?

Downside ahead for the iron ore titan?

Read more »

A man in trendy clothing sits on a bench in a shopping mall looking at his phone with interest and a surprised look on his face.
Share Market News

5 things to watch on the ASX 200 on Monday

Here's what to expect on the local market today.

Read more »

a man sits back from his laptop computer with both hands behind his head feeling happy to see the Brambles share price moving significantly higher today
Broker Notes

Broker tips Domino's Pizza share price to rise 54% in FY26

Ord Minnett says the current Domino's Pizza share price offers "very attractive value".

Read more »

Happy shareholders clap and smile as they listen to a company earnings report.
Share Market News

Top fund manager backs these 3 ASX 200 shares to shine in FY26

Let’s see who they are.

Read more »

Worker working on a gas pipeline.
Share Market News

Macquarie predicts 26% upside for this ASX utilities stock

Here’s what’s behind the brokers recommendation.

Read more »