This article is the final one, if you look at it globally from the perspective of becoming an investor. It is the final one because, having “pulled up” the level of financial literacy, for the successful implementation of a financial plan, you also need a “correctly set” investment psychology. Those who are already sufficiently savvy in financial literacy can safely begin to “pump up” the psychology of investment.
In general, what is investor psychology? This is the nature of making investment decisions depending on the situation on the markets. That is, roughly speaking, everything comes down to an emotional reaction to events happening in the world. In investment activities, overly emotional behavior is unacceptable, as it leads to sad consequences.
Why is this so, why are emotions the enemy of an investor? It's very simple, there are always some events happening in the world: today they are positive, tomorrow they are terrible, and the day after tomorrow the markets are completely calm. If you buy and sell assets for every "important" occasion, you will discover an interesting pattern: your expenses grow (commissions, taxes), while the return on investment, on the contrary, falls. This happens for one simple reason: the investor stops following the ancient rule that says: "Buy cheap - sell expensive".
During a market boom, those who cannot control their emotions invest almost all their funds in rapidly rising assets. As I wrote earlier, such people try to jump on the departing train. But as we know, such stories always have the same outcome - the loss of the lion's share of the invested funds. If we are talking about market insanity, then almost always this happens in the stock market, since stocks are the most profitable asset class in the long term, and accordingly look much more attractive than the debt market, which may seem semi-lethargic to many risky people.
The vast majority of investors are stupid and bought shares at the highest prices. Do you think that only private investors were stupid? Not really. Institutional investors (investment funds, insurance companies, trust managers) also participated in the market boom. Although they proved the opposite to investors. “Sweet-voiced wise men” said that, compared to defenseless private investors, they, thanks to their information resources and communication channels, can “cash out” (get rid of shares) in time. The same thing happens in many countries with developed or developing stock markets. But the experts were right about one thing: private investors who owned shares in just a few companies lost more than those market participants who owned a widely diversified portfolio of shares. In other words, such investors turned out to be big fools.
So, we found out what investor psychology is. And what can be called correct psychology? You probably already guessed, since the answer to this question partially flashed in the first part of the article. So, correct investing psychology is complete or at least partial emotional indifference to events happening in the world of finance. This approach is true for a passive investor. It is the passive approach that suits most people.
There are several useful tips that we will talk about further. Remember I said that without financial literacy, no psychology will help you invest money correctly? So the whole point is that the main tool in the fight against your emotions is knowledge.
What does it look like? Very simple. The more a person is aware of the investment process, the less he worries that he did something wrong. Of course, each person is special, so you can’t put everyone under the same brush. But you can show those moments of financial literacy, having studied which, a person himself will be able to decide what will help him best in his case.
So, methods of emotions in investment activities.
Method 1. Look at historical risk/return data for different categories of investment assets.
Yes, having seen how assets behaved in the past, you cannot 100% predict their behavior in the future. But historical data is useful for two reasons: you can see the maximum loss that could be incurred on a particular asset, as well as what its average return was at this level of risk.
This makes investing in the asset in question more predictable, since the return on the stock market, and indeed on other markets, always tends to the average, and crisis periods are often similar to each other. The main thing is that during the history of the asset category research there was at least 1 serious financial crisis (a sharp drop in quotes). Only then can you assess the real risk of investing in such an asset, as well as the degree of compensation for the risk.
Method 2. Create a well-diversified investment portfolio and stick to its structure.
Yes, it sounds trivial and this is what every self-respecting investor should do. But in fact, it works. It works because to maintain the portfolio in the selected configuration, you must periodically rebalance it.
The thing is that different asset categories vary greatly in profitability, so your portfolio will deviate from the selected option over time, and this is not good, since in this case its risk/return parameters change.
To do this, you need to periodically put the portfolio in order, sell assets that have risen in price and buy cheaper ones. This procedure is called rebalancing the investment portfolio. That is, by carrying out this operation, you strictly follow the golden rule of a successful investor: buy cheap - sell expensive. You become a person in reverse, doing everything contrary to the stock market crowd: you buy when people are trying to get rid of assets and sell when people are eager to buy them. The frequency of rebalancing the investment portfolio varies from 1 to 3 years, depending on various conditions.
Method 3. Monitor the state of your investments less often.
Seriously, this is probably the most effective method of combating emotions in investment activities in my opinion. It works great for one simple reason. The less often you look at the state of your portfolio, the more often you see positive results.
If you increase the term to 1 year, the situation looks more optimistic: 52 successful years against 28 unsuccessful ones. But keep in mind that here we are talking about only one category of assets. If you look at the investment portfolio as a whole, due to the diversification effect, market fluctuations are smoothed out and there will be many more positive years. And it is unlikely that you will be able to forget about your investments for a year.
In general, in practice, we advise checking the portfolio no more often than you replenish it. This can be once a month, once every six months or even a year.
Method 4. Tell your loved ones that a consultant is handling your affairs, that everything is under control. This method will help if your loved ones are overly conservative, inappropriate for your situation. Usually they advise not to do “nonsense”, not to take risks and put money in the bank. Instead of explaining to them that you have chosen a comprehensive financial plan that suits your personal financial situation and strictly follow it, no matter what, it is better to say that a professional is doing everything. Seriously, you will save a lot of time.
Method 5. Meditations
A joke, of course, but there is some truth in it. By meditating, you can take a clearer look at your problems, fears, desires, dreams, etc., so to speak, put everything on the shelves.
Today you learned what is generally meant by such a term as investment psychology, what can be called the “correct” psychology and how to achieve it in practice. We gave you some useful tips on how to curb your emotions in the process of investing. We hope they will help you. If not, write in the comments, I will try to come up with something.
Finally, I would like to say that emotions are an integral attribute of a person and it is impossible to suppress them completely. Everything depends on the person, creative people are more susceptible to emotions, therefore, it will be more difficult for them to invest, while for callous people it is easier.
But I would like to note that excessive emotionality originates from erroneous expectations regarding personal investment efficiency. So study financial literacy to erase this difference between expectations and reality, and self-control will tighten itself and will be a pleasant bonus that will allow you to achieve your goals.
The article helped me a lot in developing my business. The authors tried to reveal the very essence of the issue of financial activity. More information could have been added.
I would still like to see more disclosure of some topics, but in general the article covers all the important issues related to financial activities. I will follow the release of new articles and study the topic of finance in detail.
This article provides a comprehensive overview of modern investment strategies, combining theoretical concepts with practical applications. It is a must-read for both beginners and experienced investors looking to improve their approach.
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