Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
Thomas Jefferson once said that “With great risk comes great reward”. This can certainly be true with investing. Sometimes, a higher-risk investment is worth it due to the potential payout. Yet how can you manage the emotions involved, even if your confidence is high?
In this article, our team at Bure Valley Group offers some insights into why humans often struggle with high-risk investments. We also offer ideas about how to manage the emotions that can come with more “adventurous” investment styles – such as angel investing.
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Know your emotions
Socrates put it well when he once said: “To know thyself is the beginning of wisdom”. Knowing your emotions – and the power they have over you – can bring huge power not just to your portfolio, but to your life at large.
The destructive impact of negative emotions is a recurrent theme in stoicism, religions (e.g. Buddhism) and stories in popular culture. Star Wars, for instance, talks about how fear is a destructive path – leading to anger, hate and suffering.
These themes are pervasive because they ring true to what we instinctively know about ourselves. Our emotions are part of our humanity. Yet the person (or investor!) who does not grasp their emotional makeup – also mastering it – is vulnerable to him or herself.
Our emotions are complex and wide-ranging including happiness, sadness, disgust, surprise and anger. However, perhaps the most powerful one is fear.
Fear is deeply rooted in our biology. The flight-or-fight response served our ancient human ancestors well, helping them respond quickly to dangers in the wild. Yet for the modern investor in 2023, it can lead to excessive caution and risk aversion.
Of course, it is true that investors are sometimes overconfident – putting too much faith in their knowledge or abilities, due to the illusion of control. Yet psychology has demonstrated that fear of loss is usually the bigger problem, leading investors to miss out on opportunities.
Managing investor emotions – some foundations
Recognising your emotional weaknesses is a big step which many people overlook. Yet what can you do about them? Fortunately, there are ways to mitigate them.
Firstly, working with a knowledgeable, experienced and trusted mentor can be invaluable. This person can help draw your attention to information or biases that you may have overlooked.
A mentor can provide a type of “anchor” when you feel disproportionately influenced by your own emotions – and, perhaps, by the wider investment “herd”.
Secondly, set clear investment goals from the outset. What do you realistically want your investment (e.g. in a startup) to achieve? What are the objective goalposts you will use to define success? What are the conditions for your future exit? At what point – and under which conditions – do you cut your losses?
Thirdly, always diversify. The pain of a particular investment’s underperformance will likely feel less acute when balanced against the performance of your other investments (which, hopefully, will help provide some “value buoyancy”).
Fourthly, always try to keep a long-term perspective. Obsessively tracking your investment every day can, in fact, lead many investors to stress and obsess – often resulting in impulsive buy/sell decisions which they later regret.
Here, angel investors often have an advantage. Public stock prices are updated multiple times per minute. Yet private companies have no “ticker symbol” for investors to watch compulsively. However, be careful not to interfere too much with your startup investments. Try to strike a balance between guiding the founders whilst letting them steer the ship.
Always keep learning
Investment mistakes can be painful, yet they can often provide opportunities to learn and strengthen your future strategy. No investor fully knows every trick and insight. No investor has fully “arrived” at being their best.
This means we should always be humble and willing to educate ourselves. After all, markets are continually changing and new opportunities, asset classes and strategies emerge regularly.
Markets and economies evolve constantly. For instance, interest rates, inflation and geopolitical events can all impact investment returns – presenting new opportunities and threats. Keeping your ear to the ground can help you remain adaptive and resilient.
Regulatory frameworks can also shift, requiring an investor to make revisions and updates to remain compliant and nimble. Growing an understanding of unfamiliar areas – such as tax planning – can also help you improve your real returns and overall financial wellbeing.
Being part of a professional investor network can be invaluable in this respect. Here, many investors will bring different perspectives and experiences, drawn from many different walks of life. These people can help you refine your skills and improve weak areas.
As Proverbs puts it: “As iron sharpens iron, so one person sharpens another”.
Invitation
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