“Psychology is probably the most important factor in the market – and one that is least understood,” said David Dreman.
The psychological cycle of investing can greatly influence the outcome on a personal and collective scale in the financial markets.
With 24-hours new cycles and smartphones reaching the remotest of locations – the speed at which information is disseminated tends to create exaggerated reactions.
Similarly, while investing in the stock market, building your understanding becomes as important as tracking the markets.
There are 3 ways in which investors can make rational investment decisions that may potentially strengthen their portfolios in any stock market environment. Let us look at some of them:
-Emotion-based investing decisions:
Investors who allow their emotions to dictate their investment decisions will suffer from poor long-term results. Such investors will chase stocks that appear to be doing well, for the fear of missing out on making money.
This leads to speculation without regard for the underlying investment strategy. Investors cannot afford or should not get caught up in the ‘next big craze’ or they might be left holding valueless stocks when the craze subsides.
Therefore, do not make the mistake of trapping yourself in such market frenzies – your focus should be clearly on stocks that offer long term growth prospects.
It is also necessary to build your ‘Edge’ if you want to make investing sustainable and scalable and not a flash in the pan.
-Let goals define your psyche:
Start by asking yourself, why are you investing? From the answer, you can determine timelines, expected rates of returns, your appetite for risk, etc. Your savings and investment activity should always be driven by your goals.
Suddenly, you will have boundaries and parameters to define what a successful investment should look like. And more importantly, what costs are you prepared to pay to achieve those investment goals.
If you know what to watch out for, then you can take precautions and avoid them as far as possible. Automating your investments and inculcating the practice of periodically monitoring and rebalancing your portfolio can go a long way for maintaining that psychological edge.
-Read and read more:
Building investment psychology requires time, discipline and lots of analysis. To provide you a perspective, the world’s most famous investor Warren Buffet has credited his success to spending more than 80 percent of his time – reading.
When you start as an investor, you are still growing and absorbing things around you. Start your investment habits early and gradually work towards building on them. It will help you to understand how the market cycle works.
A cycle can last anywhere from a few weeks to several years, depending on the market in question and the time horizon at which you are looking. Although not always obvious, cycles exist in all markets.
Analyzing the market will help you be a smart investor and recognize the different parts of a market cycle to take the most advantage of them to make a profit. This will ensure that you are less likely to get fooled into buying at the worst possible time.
A simple truth in our world is that there are two general ways to make money: either you work for it, or your assets work for it. It was true for our parents, and it is true for us.
And if you believe the numbers, it is much more relevant for us, as we typically have more disposable income than our parents. Hence, focus on building psychology aimed at wealth creation and you will find yourself evolving as an investor with time.