The psychology of investing, or how to make decisions without emotions

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Financial literacy and knowledge of the basics of successful strategies alone is not enough to become a specialist in the world of investments. It is necessary to take into account the influence of the so-called investment psychology. It is especially important for novice investors to take this factor into account in order not to panic at times of global change.

What aspects should be paid attention to those who want to take their place at the pinnacle of success, and not collapse into the abyss of failure? What principles guide experienced players? About this and much more – in our new material.

The psychology of investing: the meaning of the term

Under investment psychology understand a certain strategy based on the use of special tools to overcome emotional overload and obtain high financial results. The foundation of the system is the ability to make at least small achievements every day thanks to personal motivation.

The use of such tools makes it possible to make the right decisions of an investment and financial nature, taking into account various factors that exist in the currency market, in the global economy and industry.

But all this is real only in a situation where the sphere of emotions is under control. Disheveled feelings rob you of concentration and prevent you from following your own rules for investing. And the lack of control in a crisis often leads to mistakes. For example, the acquisition of assets during a period of their rapid decline or appreciation is fraught with the loss of personal capital.

The spectrum of emotions of the modern investor. Source – Milanaryal

Investor psychology: main principles

So, turning off emotions during decision-making helps to avoid many negative financial situations. Asset price fluctuations are no excuse for emotional overload. The value of currencies, stocks and bonds is always changing, and only the degree of stress resistance of an investor determines how much benefit he will receive in a particular situation.

Let’s list the main principles investor psychology:

  • Maintaining a balance. The attitude of any investor to his contributions is determined by two conditions. The first is greed, that is, the desire to earn as much as possible. And the second is fear, that is, the difficulty in making a certain decision due to doubts and the likelihood of losing money. Finding the perfect balance in this situation is difficult, but possible.
  • Information accessibility. Decision-making in the investment market often occurs on the basis of disparate and unreliable information. Therefore, many investors are constantly looking for a source of up-to-date information about asset price fluctuations. Interestingly, they still find ways to balance work with a huge information flow. However, some develop dependence on constant monitoring and abundance of data. This factor reduces income.
  • Inspiring first positive experience. In the investment market, a graphical method is used for analysis. Often it gives positive results. The first successful experience sometimes provokes excessive euphoria among beginners, and therefore, the likelihood of financial losses increases. In this situation, pride and excessive confidence in one’s knowledge are dangerous. It should be understood that the course of events can be changed by any random factor.
  • ossification. This pattern of behavior manifests itself whenever an investor is faced with a difficult situation. He makes decisions on the basis of already available data – his own or others. If the various options available are not analyzed at this point, the final decision may not be accurate.
  • Intuition. This aspect is no less important, since each participant in the investment market makes decisions independently. Developed intuition is no less important than accurate analytical data or a carefully crafted financial plan.

It should be noted that investment psychology takes into account all the parameters that allow you to build the correct behavior of the investor for the sake of making a good profit. And beginners should study in detail all aspects of financial literacy, draw up an income / expense plan and analyze the main aspects of each investment object. This approach allows you to form the thinking and psychology of an advanced investor.

What emotional difficulties lie in wait for the investor?

Emotions in investing. Source – Valueresearchonline

Each contributor must understand that he will face many trials and difficulties on the way to achieving his goals. Especially emotional. Consider them:

  • Easy first profit. This situation occurs when the investment portfolio is formed before the growth of the market. Excessive emotions are useless here, because the rise will not last long. It is better to follow the principles of a prudent investment strategy and adhere to the basic rules of discipline. It must be remembered that the next such boom may have to wait several years. And strong growth is likely to be followed by a recession – you should not count on high returns all the time. Be cool.

  • The onset of a period of losses. The value of an investment portfolio is not a dogma. It is constantly changing due to market fluctuations. Do not fall into despair, because the assets were bought in the long term, and after a while their value will change again. In such a situation, it would be unreasonable to expect profit within a month after the acquisition of the asset. It is important to remember that the decision to sell stocks or bonds should be made after fundamental analysis, and not on emotions. If the selected company is still promising, its news background and financial indicators have not changed, then price fluctuations have occurred under the influence of market events. It happens, and this factor must be taken into account. Therefore, to reduce psychological pressure, it is necessary to use knowledge, and not rely on emotions and general panic. It should be understood that the loss / profit in the stock market is fixed only when the asset has been sold. The rest of the time, only the asset and its time value exist.
  • Mistakes. Everyone allows them. The reason may be a poor-quality analysis that did not allow the investor to see the problems of the company. Or too high and unreasonable risk. In this case, it is important to understand that failures happen, but there is nothing to worry about. Don’t give up after the first mistake. It is very important to analyze it, because it is such an analysis that can become an impetus for further growth. First of all, portfolio diversification remains the main way to minimize any investment mistakes. And, of course, it is necessary to conduct a qualitative analysis before buying any assets.
  • Universal technique. Each investor periodically undertakes a search for a universal way that can help in any situation and answer all questions. Let’s just say that this is a profound misconception. There is no perfect method. The most important thing is theoretical knowledge and the ability to use it in practice. Without it, there is no successful investment.

Psychology of an experienced investor, or how to overcome emotions

In the world of investing, it is difficult not to succumb to the emotional heat, but it is possible. One of the ways to overcome difficulties is knowledge. An investor who has studied all aspects of the investment process has a much higher stress tolerance than a beginner. Many nuances are an open book for him, and the information from it can be easily used in any situation.

The impact of conscious emotions on investing. Source – Whatinvestment

So what are the ways to control emotions?

  1. Monitoring patterns and historical facts. Such information does not allow predicting the behavior of a particular asset in the future with absolute accuracy. But it is quite possible to determine the maximum loss and average profitability for a given degree of risk. Thanks to such tools, the asset becomes more predictable. This is due to the fact that the crisis periods of assets are quite similar, and their profitability tends to the average value.
  2. Building a diversified portfolio. Each investor’s portfolio should be diversified, but it should be constantly rebalanced. This is due to the fact that over time it will increasingly deviate from the chosen strategy. In this case, you need to clearly follow the rule: buy low – sell high. This principle goes against the principles of the stock market crowd. When the bulk of investors seek to sell assets, they need to be bought. And vice versa. On average, such a rebalancing should be carried out every 1-3 years.
  3. Minimum investment cost tracking. The best way to protect yourself from fear, greed and emotionality in relation to your own investments. Watching stocks or bonds rise daily will not do you any good. If you study their cost less often, you will definitely be able to see positive results and notice patterns. In general, you can check the portfolio at those moments when it is replenished.
  4. Availability of a consultant. If close people constantly comment on investment deposits, pointing out the incompetence of the depositor, it is best to inform them about the presence of a consultant. This simple example will reduce the degree of stress within the family. And the investor himself will stop worrying and being guided by emotions in the decision-making process. In the end, everyone decides for himself what to do with the money he earns.
  5. Sports and meditation. These tools are great to help get rid of unnecessary emotions and stress. Redirecting energy to the physical level calms the flow of thoughts and allows you to make the right and informed decisions. And sober thinking is the key to successful investments. In addition, it is very important to track the triggers that affect decisions. What dictated the sale / purchase of a particular stock or bond? The answer to this question will help you understand how much emotions affect the life of an investor. In the future, this will allow you not to make hasty decisions.


In fact, investment psychology – quite a significant factor in the world of investments. Sometimes investors make illogical and thoughtless actions, relying only on their own emotions. To make more informed decisions, you should turn off the emotional component. The investor should have no fear of losing money, because such a risk exists when investing in any asset.

Do not give in to the panic of the crowd – often a decision made under the influence of emotions turns out to be wrong. To gain confidence in any decision, you need to acquire financial literacy. This will allow you to clearly draw the line between expectation and reality. There will be no unexpected situations. The degree of emotionality will also decrease, which will allow you to more effectively achieve your goals.

Disclaimer. Investing in any financial asset carries the risk of losing capital. Nothing in this text can be considered an investment recommendation or an offer to buy/sell any financial instruments. For all their actions in the stock market, each investor bears full responsibility independently.


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