Understand yourself before you can succeed at investing. Our investing personality usually mirrors the type of people we are in life. Being human, everyone has emotions. However, how you react to those emotions determines your success as an investor.
In other words, the action you take (e.g. buying or selling investments) while you're experiencing emotion will contribute to the ultimate outcome you achieve.
The stock market is a device for transferring money from the impatient to the patient. Warren Buffet
Stock market sentiments when looking at the fear and greed index?
Understanding the primary stock market fear and greed index drivers and their associated sentiments and learning how to respond to them will give you a valuable opportunity to profit. If you have been investing for a long time, you will probably recognise these sentiments, just like an old friend; "Remember when your friend 'Panic' came by in October of 2008?"
Investing falls into two groups of emotions 'Fear' and 'Greed'. The stock market is just people buying and selling from other people. Therefore emotions are bound to come into the equation. History has indicated that markets rise and fall based on emotion. For example, when Capitulation sets into the market (the majority of people have sold their stock), it is often the moment when the most money is made or lost, depending on whether you are on the buying or selling side.
In March 2020, people panicked worldwide, and that fear permeated through the stock market in record time. Everyone around me was selling all their stock. People were even cashing out their retirement savings because they thought the world was ending.
Investing in markets at these times is financial suicide for the average person. It would be like running a marathon with no training. You will be outrun every time by those who have prepared their minds and body for the strain.
Just like running a marathon, getting mentally prepared for investing requires spending time and effort learning, practising, and, yes, investing money to get ready for when that perfect opportunity arrives.
In March 2020, were you selling stocks, or were you buying them cheaply from everyone else?
Emotional Investing harmful or helpful
Below we will discuss some ways I have found work outstandingly well to control emotional investing and allow you to make the most of these spectacular buying opportunities.
Diversification
To minimize your drawdowns during market fluctuations, a useful method to hedge your investments is to diversify your portfolio. That way, if a specific event heavily impacts one company, other investments can compensate for the loss. An example of the impact diversification can have is that of Paypal over the last seven months, which has declined 9% in value. At the same time, Meta has increased 164%, and both of these companies are part of the Nasdaq 100 index. So someone who invested in the Nasdaq 100 rather than Paypal would have been 40% better off on their investment so far this year.
There are many great articles on diversification and creating a balanced portfolio. I've included some of them below.
Dollar-cost averaging
Dollar-cost averaging is the practice of regularly investing the same amount of money into investments at a regular interval, e.g. through automatic payment. There are some key advantages to this approach.
Because you can purchase more shares with the same amount of money when the price is lower, your average purchase price over time is lower.
In the example below, if you purchase the entire amount of $22,000 in month one, then by the end of two years, your investment has declined 29%, whereas if the investment were invested by dollar cost averaging the amount, you would have broken even.
But the real magic happens as you move into the future. Because your purchase price was lower, the returns you achieve on the investment change significantly. Over eight years, the returns during a market downturn between these portfolios would almost double. The dollar cost averaged portfolio would return a staggering 28% per year!
Anticipate and Prepare
Looking back at how the market behaves doesn't necessarily tell us what it's going to do in the future, but it does allow us to examine our reactions and how we would respond in certain market conditions.
Preparation is the key to every success. If you don't develop your strategy and practice your approach, when game day arrives, you will likely crack under pressure.
Write it down!
I have documented my entire strategy, and whenever there is an update, it goes down in writing. This way, when I need to make decisions in the heat of the moment, there is a guideline for exactly what to do. I recommend you write down your strategy somewhere you can retrieve it easily.
Stop looking at it
Think of your stock portfolio as a house. When you buy or sell, you do your due diligence. However, you wouldn't typically evaluate it every day. If you need to monitor it daily, it may be time to re-evaluate your strategy.
If you don't have a strategy and are interested in learning the strategies I've developed over twenty years of investing, some of which generated over 100% return this year, then subscribe to our free Stock Market Investor BootCamp below.
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