5 Investment Psychological Traps and Ways to Overcome Them – Part II

5 Investment Psychological Traps and Ways to Overcome Them – Part II

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:

  1. Learn To Control Your Emotions
  2. Check Your Portfolio Less Often
  3. 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.”

Benjamin Graham

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. ”

Warren Buffet

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.”

Warren Buffett

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.

I have written a similar article about my experience with social media in this coronavirus lockdown. Check it out – My Personal Experience With Social Media In This Coronavirus Lockdown

If you learned something and enjoyed reading this article, then please consider sharing this with your wonderful friends as well. Thank you so much!


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This Post Has 34 Comments

  1. uzzawal1911

    Well said, we should get scared when the market is greedy and get greedy when the market is scared, buy low, sell high. You have pointed a few important points in investing, great going.

    1. Pro Investivity

      Thank you for your kind words, Uzzawal. Delighted to see you again! 🙂
      Buffet’s quote right on point! Thanks a lot! Cheers!

  2. whatnow411

    Wow, some pretty interesting stuff here! Thank you for sharing!

  3. Betty Mully

    Wow ,very interesting indeed.I loved this one “Going with the trend is fun until you realize you were on its wrong side”,and sometimes by the time you realize it is very late and it has costed you time and resources.Thanks for such a good piece.

    1. Pro Investivity

      Thank you for your warm comment! We sometime follow the trend only later to realize about our huge mistake. You are true about expenses of time and resources we dedicate following the trend.

  4. DEFHXY

    A very interesting post! I specifically enjoyed reading “The problem with this strategy is that when you find a trend, the market will have already exploited before you knew” – it was a rather eye-opening statement.

    Thank you for this post!

  5. Memento Koi

    This one is timely. I’ll share this to my friend. He’s into investment nowadays. Thank you for sharing this article.

  6. I really enjoyed reading your two part series here, and I’d like to add one thing as a suggestion to other readers – based off what I do with my own personal investments. I, in the first 3 months of my investment, take down the net gain/loss (all time) and make a graph.

    While I understand that it can be a little obsessive, it really allows me to see that it will rise, and will fall, but that’s okay. Then, I drop down to checking at the end of day trading on the 1st of every month. This lets me follow the general trends of how my investments are doing, but whilst already being desensitized to seeing new changes in the market.

    1. Pro Investivity

      Thank you very much!
      Oh nice! It might be time consuming, but it’s a great way to reflect upon your portfolio. You seem to be a smart investor! 🙂

      1. Thank you! That’s certainly a compliment, particularly from somebody who knows what they’re doing

  7. Like!! I blog frequently and I really thank you for your content. The article has truly peaked my interest.

  8. SMS

    Thanks so much for the blog post.

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