Master Your Investing Emotions
Emotional control is vital to success in the stock market. Here are some tips to help you with yours:
Volatility is natural to the stock market, so you shouldn’t be intimidated by it. The market has gone through cycles throughout its entire history, stirred on by the human emotions behind it. Meanwhile the pervasiveness of trading algorithms in the modern market hasn’t helped. Over the long run, though, the market has always recovered. If you accept the fact that you will experience downturns, you’ll be much better equipped to see volatility for what it really represents: opportunity.
“Everyone has the brainpower to make money in stocks. Not everyone has the stomach.”
TUNE OUT THE NOISE
There’s plenty of news, forecasts, and other buzz surrounding the markets every day. Lots of it, if not most of it, is irrelevant to the long-term investor. For example, stock prices often move after a company’s quarterly earnings are announced, depending on how they compare to “expectations”. Such short-term results may matter to day traders and institutional investors – after all, their jobs revolve around the market. But they shouldn’t matter to you. Best to keep your eyes on the long-term prize.
“You don’t buy or sell a business based on today’s headlines.”
AVOID ACTION BIAS
It’s human nature to feel like you have to do something. Psychologists call it cognitive closure, or the emotional satisfaction that comes from simply making a decision – good or bad! In the stock market, it’s easy to buy an expensive stock because the fear of missing out on what other people have already gained outweighs the rationale that it’s no longer cheap. Investing should be boring. Oftentimes what you don’t do is as important as what you do.
“Waiting helps you as an investor and a lot of people just can’t stand to wait.”
It’s not easy to go against the crowd, but it’s critical to your success as an investor. The wider investing community tends to act with herd instincts. Both fear and greed are contagious, whether it’s panic in a bear market or FOMO in a bull market. But when you follow the crowd, you’re effectively turning off your brain. That’s no recipe for success! You can’t be better than average if you invest with the average.
“Be fearful when others are greedy, and greedy when others are fearful.”
Ultimately, the most foolproof way to avoid the emotional pitfalls that hurt many investors is to maintain your focus on the data. Your emotions may often lie, but numbers don’t. Whether you already own stock or are considering buying some, understand what the company is doing. There should be a tangible, data-backed reason for you to buy or sell a stock. The numbers will tell a much better story than any forecasts, sentiments, or changes in the stock price will.
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”