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Should emotion be a reason for investing?

24/01/2023

What are the motivations behind the way you invest? 

For many, the way in which they invest and the types of investments they choose are based on expected factors: predicted performance, risk level, volatility and more. 

However for some, these decisions are driven – at least in part – by emotion. 

But is this a good reason to choose a particular investment over another?

 

Why people invest emotionally

Emotional investing is as simple as investing in a business or a sector that you admire or have a strong emotional connection to. It may be a sports team, a business owned by your family, a sector that you are passionate about. 

It may be that you admire the ethos of a particular company – not dissimilar to those who opt for ESG investments

In some cases, this is done via crowdfunding. As Matt Cooper, Chief Commercial Officer at crowdfunding service Crowdcube, says, the motivation to invest in this way comes from “general desire to feel a deeper connection to a brand, a business or a service that [investors] care about”.

 

When it works – and when it doesn’t

Fintech provider GoHenry is a prime example of how crowdfunding can work. Its mission is “to help millions of kids be good with money” – and in 2016 and 2018, it raised $15m in crowdfunding. Those who participated in crowdfunding for the business took a share of 15.98% equity in the business. 

These shareholders are passionate about GoHenry: 99% of shareholders’ children have downloaded the GoHenry app, while they are also referring more people and spending more. 

The business has proved to be a real success story, passing 2m users in late 2022, and is now estimated to be valued between $250m and $500m. 

Leaving a more bitter taste, however, was brewery Wild Beer Co, which raised £1.76m via crowdfunding in 2017. The crowdfunded money was due to be used for a venue which would include a brewery, a restaurant and a “school of fermentation” – however, in late 2022 the brewery went into administration.

Beer-loving backers have claimed that they felt misled by the crowdfunder – with no transparency, and with the brewery admitting that the crowdfunded money was spent on equipment rather than the promised venue, which never materialised. As a result, investors received no returns. 

Emotional investing can reap rewards. However, it – like any form of investing – comes with its own risks: risks which can potentially be heightened if emotion and passion override logic. 

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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