Many traders and investors know that psychology is important when it comes to investing, but not everyone can really explain what it is.
Some of the most famous sports stars including Michael Jordan, Tom Brady and Rory McIlroy all have used psychologists throughout their careers. You often hear people saying a certain sport is 90% mental and 10% physical. You just have to watch Rafael Nadals meticulous pre-serve routine to see how high he values having a process to reset his mind; with investing, this is vital as well. We need to create a process, understand ourselves, and know our goals to be on the right track towards achieving our potential.
It is important to note that one thing that helps massively will all aspects of investing is, of course, experience. For those investors who want to be more active, remember on TBanque you do have access to the virtual account to try things out.
Before we go through some useful tips which will help you create some rules for your process, lets discuss what can happen when you lose control of your investing mindset. Individuals with a poor investment mindset, can blow up their accounts, lose everything they worked hard for and make mistakes which can affect them for a long period of time.
Now, we know that sounds dramatic but it has happened to people; they let their emotions get the best of them and the next thing they know, they have lost a considerable amount of money. If you ask many successful investors about the best investment they made, a majority of them say the best investment they made was taking a losing trade off early. They dont mention the winners, they mention accepting they were wrong even when they wanted to be right because it was the right thing to do.
Tips for the mind
Firstly, focus on your strategy. Hopefully, the previous classes have helped you understand what kind of investor you will be. So if you are someone who is long-term focused and you have a set of rules to get into an investment for a long period of time dont get drawn into investing in a position for 1 or 2 months because you heard someone talking about how a stock might go parabolic. Even if it does, remember your why. A great saying is: a loss of opportunity is better than a loss of capital. Get your process nailed down, and rinse and repeat it.
Secondly, ignore the crowd. Too many times we see people get influenced by what others are saying. Whether that be friends, news, social media and so on. If your reason for investing in something hasnt changed then stay patient and let it play out. There are great places to go to get information and there are of course experts out there who can help, but just remember your investing journey is YOURS and not theirs. Just because experts say something, it doesnt mean they have the same time horizon as you or that they would even invest in the same way as you either.
Thirdly, spread your risk and be diversified. There is nothing worse than having all your money on just one thing, as there is no guarantee that anything will only go up in value. By spreading the risk, being more diversified and not having all your eggs in one basket, you will feel so much calmer and be able to think a lot more clearly.
Fourthly, dont feel like you have to time the market perfectly. Dollar-cost averaging can be a great approach for many investors. It can help you psychologically too by taking out the emotion of being tied to one price. Instead, every month for example you are buying regardless of where the price is trading. If the price falls, you are effectively buying lower anyway too.
Lastly, have patience. We know it is the most cringe and cliche saying, but Rome wasnt built in a day and that will also be the case for your future portfolio. Dont chase big overnight returns, as that usually doesnt end too well. Remember your goals, create the process and take your time.
What do the best investors do?
Another useful thing to keep in mind from a psychological standpoint, is to understand that the market will do what the market wants to do. A great saying out there is that the market can remain irrational longer than you can remain solvent. Also, dont chase your losses. We are going to lose investments, that is fine learn how to lose before you can win. Have a plan for that and have a process you follow each time before investing. Create a checklist, if the investment doesnt meet the correct criteria move on.
The best investors will have a process and they stick to it religiously. They will avoid FOMO, following other investors views, looking for a quick buck, and they wont let missed opportunities get them down.
One thing that we see time and time again when speaking with successful investors is that at some point they have used a journal or still do. An investing or trading journal can show you so much useful information. It can show you what you are best at and equally importantly, what you are worst at. It can show you the technique that works best for you, when you perform best, whether you are too cautious or too optimistic and so, so much more.
By writing or typing up your investments you can actually get the real stats on how you perform. These stats can help you to create and nail down your process. Play to your strengths. Does Warren Buffet invest in Alt coins on a 15-minute time horizon? No he plays to his strengths.
By creating rules and having a plan, it can help massively from a psychological perspective to deal with the investment. In a way, you have already accepted every outcome. You understand beforehand where you are wrong and you understand beforehand where you would be right. Those who dont have a plan will be on edge the whole time and not know what to do.
The truth is, when it comes to psychology, you can do all of these questionnaires and read all of the books to help your understanding on the subject, but no one knows you better than yourself. By creating rules and a process and finding what works best for you, you will hopefully be well on the way to having a successful investing career.
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This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipients investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. TBanque makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.
