Despite Classical Economics mentioning human beings as rational thinkers, we have proved it wrong, haven’t we?
This is particularly true in Investing where many people have shown nothing short of absurdity.
This absurdity has brought in a popular concept called Behavioral Investment.
I have written about the 5 Investment Psychological Traps in my previous article. In case you missed it, please feel free to read it from this link – 5 Investment Psychological Traps and Ways to Overcome Them – Part I
Overcoming Psychological Traps:
- Learn To Control Your Emotions
- Check Your Portfolio Less Often
- Avoid The Trend
How to Overcome These Psychological Biases?
1. Learn To Control Your Emotions
I know it’s easier said than done, but this is the most important step you have to take to overcome the investment traps.
Benjamin Graham, the author of Intelligent Investor, is a profound advocate who believed that an investor must manage his emotions to be successful in investing.
If we are unable to control our sentiments, then how can we know whether we are making our investment decisions logically or emotionally?
A lot of investors learn this the hard way, after losing a great amount of money. But, I don’t want you to be in that ‘lot of investors’ group.
Well, there isn’t a single technique to manage your sentiments. It would depend on your personality and preference.
But all I could say is that you should be self-aware about your emotions in the first place. You won’t be able to change something that you aren’t aware of.
I have tried several methods to manage my emotions from taking a walk to scribbling. However, I have found that doing Meditation has been the most beneficial for me.
While meditating, I can achieve peace of mind and be able to think properly.
So I would urge you to experiment with a few methods before finding an ideal solution to control your emotions.
It’s okay if you are feeling hard to do so. With Time and Experience, you will be able to do it and learn to invest like a pro.
“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
2. Check Your Portfolio Less Often
If you have ever invested, then you must have had urges to check your portfolio from time to time, haven’t you?
After all, we want to know how our portfolio has been performing.
But checking our portfolio regularly might be doing more harm than good.
Whenever you see the price of your stock declining, you will feel the impulse to sell it to minimize your loss. Similarly, seeing the price of your stock will encourage you to sell it right away to capitalize on your gains.
If you have bought great stocks, then you wouldn’t have to check it frequently. You will remain confident that your stocks will give you great returns in the long run.
Investing = Long Term Horizon
Trading = Short Term Horizon
Please don’t change investing into a game of trading.
I also get the urge to check my portfolio repeatedly (Perhaps because it’s a Challenge for me as I’m a Millennial).
“You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. ”
3. Avoid The Trend
Going with the trend is fun until you realize you were on its wrong side.
As an investor, it’s tempting to jump into a trend, isn’t it?
During an uptrend, we feel that the market will go up for a long time. We believe we can buy at that time, and sell later when the market rises further.
The problem with this strategy is that when you find a trend, the market will have already exploited before you knew.
You will have to take the risk of potentially buying at the highs or lows if it’s a downtrend. Before you know, the trend could change, and leave you with nothing, but pain.
To avoid all these hassles and risks, invest for the long term.
While the market will fluctuate in the short term, it’s certain that it will always increase in the long term.
“Only when the tide goes out do you discover who’s been swimming naked.”
Just because there are a lot of psychological traps in investment that you might fall into doesn’t mean that You Shouldn’t Consider Investing.
So what other ways can you think of to avoid investment psychological traps? We’d love to hear from your in the comments.