Emotion-Free Investing

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Byline: Jean Chatzky

As the stock market continues to yo-yo, it can be tough to stay calm. Here's how to keep your feelings out of your finances.

We've all been riding an emotional roller coaster lately, watching the markets zoom up and down with no relief in sight. Who could blame even the steeliest investor for losing her cool last week as recession fears sent the Dow tumbling 391 points in one afternoon? Economists are talking about a double-dip recession. Congress is gridlocked again.

But just as you should never go to bed angry, experts will tell you to keep calm when it comes to your finances. "We've gotten better control of our emotions because we've experienced recoveries," says Louis Harvey, CEO and founder of the market-research company Dalbar. But with all the tumult these days, it can be tough to be clear-minded and dispassionate about money all the time. Here are a few techniques to help you invest with your head, not your heart:

Know where specific emotions are likely to lead. Harvard University professor Jennifer Lerner, who is also director of the Harvard Decision Science Laboratory, says anger makes people optimistic and risk-seeking, while fear makes them pessimistic and risk-averse. Sadness makes people eager to buy things; disgust makes them unlikely to want to buy anything at all; both make them likely to sell on the cheap things they already have. …