When money is in the equation, use your brain, not your heart.
People check their investments regularly, sometimes up to 5-10 times a day. When the stocks are soring and reaching daily new highs, we pile on and keep piling until the stock growth slows and the market value of that stock start to tumble. You watch in horror that the stock you put your hard-earned money into has gone down 25% in one week. You open Reddit and start going through the forums and asking degenerates what the hell is wrong with the company. Its stock has lost so much value within a week. After hours of scrolling through Reddit, you finally stumbled upon a comment from some professional sounding 22-year-old who mentioned that he made a killing getting early on the bandwagon of the Pump-and-Dump group and selling at perfect timing. Whereas you’re reading his comment setting in your dad’s basement thinking, how did I manage to lose 3 weeks of my income in one week of activity?
I hate to break it to you, but you have invested with your emotions, not hard facts and data. I know that there are a lot of factors that contribute to the growth of that company.
A company cannot fundamentally grow 50 percent in four weeks and subsequently lose 25 percent of its growth the following week.
Investing based upon emotion and FOMO is the main reason why so many retail investors buy at the top and sell at the market bottom. In times of turmoil or euphoria, an investor’s psyche can overtake rational thinking. Taking a rational and realistic investment approach is essential during what seems to be short timing of capitalising on euphoria or fearful investment decisions.
A non-professional/retail investor is putting hard-earned money in investments in hopes to increase his capital and returns on investment. Losing a percentage of our investments cause us to second guess our decision and cause unnecessary stress. Many investors have low-risk tolerance as they depend on the investments coming through.
Retail investors should view their risk tolerance as a reference guide for investing and their investing behaviour when you enter an investment with a base understanding of the risk associated with it. The base understanding can help you mitigate the wild ride of the emotional roller-coaster.
In a bull market, everyone is an expert evaluator of every company they own. They can talk about their investment for hours on end.
On the other hand, investors hear about a bad economy and fad making changes to the interest rates. It can change the market sentiment in a snap of the finger. Investors begin to panic sell their investment before the bear market swallow their returns. On Marco level, investors are introducing the bear, not the fad.
Bad Timing
Bad timing? I thought it was impossible to time the market. Well, I am not talking about the market timing. I am talking about the timing of your emotions. When you’re losing money, your emotion takes the driver seat and drives your investment to the ground. If you have done a basic understanding of the company’s fundamentals, the stock is rapidly losing its value. There are two things you can do either double down on your investments or stop checking your investment 5 times a day.
When your stock loses value, you panic sell and get rid of that stock from your portfolio. Now, don’t think of that stock as a stock. Think of that stock as your house or investment property.
Would you sell your investment property or your house as soon as it losses value for whatever reason? If your answer is yes, go to the bank and use all your savings to buy FDs(Certificates of Fixed Deposit) and stay away from all investments.
If you answered no to the question above. There is hope. There are things you can do to mitigate your emotions, taking control at the worse possible time.
Dollar-Cost Averaging
This is a strategy where an equal amount of money is invested at a set time interval. All you have to do is forget about this account and don’t open or make any changes for as long as possible. You’re buying when the market is going up or down.
When the market is dropping, you’re buying stocks at a cheaper rate, and when the market is going up, the stocks you bought previously are proving you with capital gains.
Diversification
It is a process in which you buy a range of investments from different sectors instead of only a couple of stocks.
Even though diversification may not be able to protect you from events where the whole market outlook is pessimistic. However, in normal market conditions, using diversification provides an element of protection as losses in one sector are often offset by gains in the other sectors.
Diversifying a portfolio can be a mix of stocks between different sectors and investments in real estate and different economies to hedge against losses.
Conclusion
If you don’t have the stomach to weather the roller-coaster of a volatile stock market choosing to dollar cost average while diversifying your investments can be the best thing you’ll do for your future. If you can’t stop checking your investment daily, deleting your investment apps while dollar-cost averaging with an automatic investing plan can be beneficial.
Categories: All Stories, Financial Philosphies, investing
Leave a Reply