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7 Emotional Traps In Investing, And How To Avoid Them
There are many emotional traps that people fall into when it comes to investing. These traps lead to poor investment decisions, or worse yet, not investing at all!
If you aren’t investing in the stock market, or are having very little success, one or more these seven emotional traps are probably at the root of your problem…
It’s amazing how many people start investing without reading any type of literature on the subject.
They go to their broker. Invest in anything and everything that he/she tells them to. And then they think they are doing smart investing because their broker is in charge.
People don’t seem to understand that brokers are not out to make you money. They are out to make themselves money. The wealthiest brokers are gifted salespeople. They will tell you anything and everything that you want to hear, as long as they can make a profit out of it.
How To Avoid: You really only need to read a couple of books on investing to become a sound investor. In fact, if you learn and invest in index funds, you will do better than 80-90% of investors on the planet!
Pick up a book on index funds, learn about the different retirement accounts, and you will be well on your way towards a huge nest egg when you retire.
The stock market is a game of opposites. When stocks are doing really well, chances are they are going to go down. And when stocks are doing poorly, the chances are that they are eventually going to go up.
People seem to get this confused on a daily basis. A financial advisor once explained this concept perfectly to me…
When you go to the mall and visit your favorite clothing store, do you buy all of your clothes when they are charging the maximum? Or would you wait until they are having a big sale? Well, when the stock market is doing poorly, it’s kind of like they are having a big sale. It’s much better to invest then instead of when the stock market is booming.
If the stock market is too good to be true right now, it’s probably going to crash. This is what happened at the end of the roaring ’20s. It’s also what happened during the late 1990’s and early 2000’s with the dot-com bubble. Be aware of this so you don’t fall into the recency bias trap.
How To Avoid: Never forget that today’s results mean nothing about what will happen tomorrow. Even the most successful investors such as Warren Buffett admit that they have no idea what the stock market is going to do in the future.
Don’t worry about what the stock market is doing today. Instead, think about how you can come out ahead 10, 20, or 30 years from now. Then, forget about it! Let everybody else do all of the worrying for you.
Holding On For Dear Life
Some people refuse to sell a stock until they have at least made some kind of profit from it. When the stock they invest in continues to plummet, they ride it out to the end.
As a smart investor, it’s sometimes the right decision to sell and cut your losses. Nobody is ever 100% right, so understand this and don’t let your ego get in the way.
How To Avoid: The best thing to do is to implement a strategy before you start investing in something. Say to yourself, “I am going to sell this stock if it gets down to X amount.”
By doing this beforehand, you have made a firm commitment to
yourself and will prevent you from losing more money than you should.
Here’s another emotional trap that gets a lot of people into trouble. They make some wise investments, then they get a little cocky and start to invest more than they should. Then the market changes and they are suddenly brought back down to reality.
Just because you might be having some success doesn’t mean that it will continue. The stock market is unpredictable and nothing is a sure thing. Especially when it comes to short term investing.
How To Avoid: Never forget that there is no way of predicting what future stocks will do. No matter how good it sounds, or how good the economy is, the stock market always has a way of balancing itself out.
Fear Of Loss
I would say the biggest reason that people don’t start investing is because of the fear of losing money. They have this idea in their head that the stock market is a scam and the only way to make money in it is if you live on Wall Street and study stocks all day long.
Nothing could be farther from the truth!
Believe me, you don’t have to be smart at all to make a lot of money in the stock market. In fact, often times the less you know, the better off you are! This is because there are some common sense strategies out there that basically guarantee you come out ahead with investing in the long term.
How To Avoid: There is always a chance when you invest that you will lose money. But don’t let that bother you…
If you look at the history of the stock market in 15 year intervals, every single time it has went up! During those 15 year intervals, there might be a few years where it goes down. But when all is said and done and the 15 years is up, the stock market goes up.
The more you learn about index funds, the less fear you will have about investing and the stock market.
Obligation Toward Your Business
For many people, the only type of investing that they ever get into is purchasing stocks in their company. While this strategy works well for some people, it’s not a good strategy for everyone.
There are better (and safer) ways to invest than just owning stock in your company.
Don’t feel obligated in any way to own stock in your company. Smart investors look at companies entirely for what they are and their potential growth. If you aren’t 100% confident in your company, why would you invest in it?
How To Avoid: Unless you are the CEO and have a commanding influence on what goes on, there is no real advantage to owning stock in your company. Instead, educate yourself in the field of investing so you can make wise decisions on where to put your money.
Many of us have a tendency to over analyze because it can at times seem so complex. We say to ourselves, “I don’t want to invest in this until I am sure it is 100% safe.”
The problem with this is that day will never come! You will eventually stop analyzing it and forget all about it. This is a serious mistake when it comes to investing.
In order to be successful, you need to get started as soon as possible!
If someone put $5,000 into a tax-free retirement account when you were born and it had an average annual rate of return of 10%, it would be worth $2,451,854 when you retired at age 65. If someone gave you that same $5,000, but waited to give it to you until you graduated high school, you would only have $440,987 when you retired. Don’t wait to invest in your future!
How To Avoid: Understand that with investing, the sooner you get started, the more money you are going to have in the long run. This, of course, assumes you have a well diversified fund such as an index fund (which you are probably sick of me mentioning by now).
Don’t get in the habit of over analyzing and letting fear take over. Yes, there is a chance you will lose money. But in the long run, there’s a much better chance you will come out ahead…
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