Stock Market Emotions! When I started to invest in stocks, the biggest challenges I had was to deal with my emotions when I see the investments returns go up and down. Especially, made it even harder to deal with when it goes down (Red all over!).
When the value of my investment goes down, I panicked and stressed. Stress is most common emotions I struggled to deal with. As a result, I pulled out of the market and lost money.
On the other hand, when the market goes up, I worried missing out. To deal with the anxiety of missing out, I entered the market at all time highs and sold again when market drops, end up losing money again.
These two extremes drives investors nuts and end up buying a high and selling at low. This is applicable even when investing in index funds as a beginner. Because, it does not matter whether it is an individual stock or index fund, the red alert (loses) bothered me when I started to invest as a beginner.
I have been investing for years now, it stills bothers me but I found ways to better deal with it.
For a beginner, the ability to deal with stock market emotions is absolutely challenging. But, practising some simple strategies can help deal with it and make you profitable in investing.
Stock Market Emotions: Drivers
All through time, people have basically acted and reacted the same way in the market as a result of greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis. Over and over, with slight variations. Because markets are driven by humans and human nature never changes.Jesse Lauriston Livermore
Jesse is probably the first to talk about the impact of our emotions that drives our investments. Four deadly drivers are as follows.
Stock Market Emotions: Greed
Greed is the first of all as it is basic reason why we start to invest in the stock market. However, when I was a beginner, I started chasing the market and bought stocks that was overvalued and most talked about in the media.
When the market moves up, I watched my returns increased, even doubled. This provided a great feeling of being right with my investment. However, that feeling was not long lived. The market suddenly drops, I sold it to cut my losses. This leads to the next driver which is fear.
Stock Market Emotions: Fear
Fear is the most powerful of all emotions. As human, we naturally tend to react to the fear of losing money and sell out our positions when see the markets goes down and when the returns all in red.
I am no exception when started to invest as a beginner, I sold the stocks to cut my losses. Money lost is not only from the stocks but with the transaction cost when buying and selling the stocks through a brokerage.
Stock Market Emotions: Hope
Hope go hand in hand with fear. It pushes us little further to wait to fight the losses and survive with a hope to profit. But, when our investment are wrong i.e. when we bought at wrong price, waiting longer with a hope can make our investment even worse. It leads to more losses.
Stock Market Emotions: Ignorance
For retail or individual investors have very little knowledge about the business, which make us pick a wrong stock or even mutual funds or tracker funds. Especially, when buying just by following news and rumours have impaired my portfolio when I started to invest as a beginner.
Most beginners pass through the tunnel of these emotions whilst investing. I am not an exception but this provides a good experience as I learned from my mistakes.
Ways to Deal with Emotions When Investing
The hard earned lessons and following some strategies helped me to deal with emotions and become profitable in investing in the long run. Below are strategies I follow to deal with emotions when investing.
From my mistake, I learned timing the market, that is, trying to buy at low and sell at high, most often led to losing money.
In order to avoid trying to time the market, I have automated my investment in tracker funds. Every platform nowadays offers regular savings options to automate your investment into active mutual funds and tracker funds.
Tracker funds are best to invest for beginner as it provides diversification and cost less to invest than active funds.
You can also automate your investment in active mutual managed if you decide invest on it for any reason. For mutual fund investment, Shepherds Friendly Society Ltd allows to save regularly from just £30 per month with Stocks & Shares ISA.
Do Not Check Your Returns
When I started to invest, I curiously check the returns of my investment every day (sometime 2 or 3 times day). This made me panic when stock market pull back and returns were negative (Red Alert!).
It urges me to take actions quickly without second thought and led to sell the stocks or funds. This was a terrible mistake I did in the past and lost money. This is otherwise called short-term trading. Various studies 90% of short-term trading loss money.
From this hard earned mistake, I avoided looking at the screen often. This does not mean I do not check my portfolio at all but I reduced frequency. It is best to re-check every 6 months or 1 year, that too for the purpose of rebalancing my portfolio.
Do Your Own Research
Either I invest in individual stocks or mutual funds, trackers funds or ETF, I always do fundamental analysis based on past performance of that investment vehicle.
I Invest only when my analysis convenience me. I do not invest because my broker is advising or a friend is suggesting.
Always do your own research.
For example, when investing in individual stocks, I analyse the fair or intrinsic value using Graham’s method. For investing in tracker fund, the 10 year performance of the fund and tracking error are the metrics I would analyse to invest. This avoid ignorance to some extent than blindly investing without basic knowledge of the business or fund.
Related Books to Read:
- Reminiscences of a Stock Operator – Buy on Amazon
- Intelligent Investor: The Definitive Book on Value Investing. Buy on Amazon.
- The Financial Times Guide to Investing:The Definitive Companion to Investment and the Financial Markets: The Definitive Companion to Investment and the Financial Markets. Buy on Amazon.
- One Up On Wall Street. Buy on Amazon.
- Overcoming Underearning: A Five-Step Plan to a Richer Life. Buy on Amazon.
Dollar Cost Averaging
This approach again helps me to avoid timing the market. Historical and mathematical data has proven that timing the market always fails to be profitable in stock market investing.
This is one of my biggest learning of all from my past mistakes. As a result, I always invest small amounts in regular interval rather than awaiting for market lows to invest lump sum amount. Doing this for a very long run, have personally yield good returns for me.
Market timing stressful as I have to wait with cash for the market to pull back. Sometime it takes months or years and market would have moved up a lot. This leads to the worry of missing so I end up investing at market high.
However, dollar cost averaging greatly helps to avoid both the emotion of fear and greed. It keeps me investing whether it is bull or bear market.
Even when buying individual, I buy the stock with small amount every time it dips below my intrinsic value rather than buying lump sum.
Following the old proverb of not putting all savings in one basket, I have created an asset allocation based on my financial goals. I am investing in various asset classes such as stocks, gold and bonds. This greatly minimise the risk in my portfolio.
Spread money in many different asset classes such as investing in index funds and bonds help conquer the fear of losing all your money and helps to stay invested rather than jumping in and out of the market.
Emotions plays a major role in our personal life but you have to leave behind your emotions to make investing decision to be successful and profitable investor in the long run.
Self-discipline is key for succeeding in any profession such as sports, engineering, business and so on. It is no exception when it comes to investing. A self-disciplined investor can become profitable even with very little knowledge about the stock market.
Create a goal for investment and allocate your funds on various assets in regular interval by automating your investment to stay invested regardless of the market movements.
Keep your emotions in check and stay Invested:)