The psychology behind investing
You may have been on the sidelines for some time, following the stock market and watching it go up, down and sideways. Pundits tell you now may be the best time to invest, while others tell you to get out. With so many opposing opinions, it can be difficult to know what to do, whether you’re a beginning investor or have been in the game for a while. Here’s how to rely on yourself.
An old Wall Street adage states that two factors move the market: fear and greed. This characterization is far too simplistic. The human mind is very sophisticated, and human emotions are very complex. The emotions of fear and greed don’t adequately describe the psychology that affects people and investing.
Why do investors do what they do and then react to what they experienced in so many different ways? Successful investing requires something perhaps even rarer: the ability to identify and overcome one’s own psychological weaknesses such as overconfidence, selective memory, self-handicapping, loss aversion, anchoring, confirmation bias, mental accounting, framing and herding.
An investor, if successful even one time before may think doing the same thing may yield the same results. This mantra does not seem to be realistic given that markets are prone to financial shifts for a multitude of reasons. Any investment whether conservative to aggressive has risk and every investor is exposed to some form of it. The key is to mitigate the risk and attempt to maximize the return is within an investing tolerance.
Investors may not have a clue as to what an asset class is or how one class relates or interacts with another type of class. How does a gold stock fair when placed in a portfolio with large cap stocks and bonds? What effect does inflation, changing interest rates or political unrest overseas have on their portfolio asset class holdings? What strategy does an investor have in place to help decide to hold, sell or buy additional assets?
Knowing what financial personality trait you have can help you minimize your self-talk and propel you into understanding and maximizing your investing strengths. There are those self-motivated investors who once understanding their own psyche can move in a positive direction and be content with their decisions, good or bad. Being honest with one’s self and taking a life’s inventory of current situations and anticipated changes allows for a realistic approach to investing and establishing goals across the board and in all facets of their life.
Metro does not endorse the opinions of this author.