Investing in the stock market is difficult and scary, especially when media/news outlets are constantly drowning the markets and investors with financial news.
Before I began learning about investments, I too, was scared. Imagine investing 30k into the market and a week later some financial fancy pants ‘expert’ predicts a market crash?… yeah, most people would sell their stocks and take the loss.
Although this is very common and our brains are actually wired to behave this way, how can we resist the temptation to sell?
This urge can be resisted by understanding some simple concepts related to investing and media babble.
Below I explain some ideas I have found helpful in avoiding reacting emotionally to my investments.
Firstly, you must understand that you will lose money and there will be a market crash in my/your investment lifetime, this is very probable and almost guaranteed.
Typically, people sell stocks when the market crashes which means they have sold their stocks for cheaper than what they bought at.
This can be avoided by being a longterm investor with diversified index funds which means you will most likely outlive the crash and reap the rewards of the market rise.
Another smart tactic is to use the crash to your benefit. As quoted by Benjamin Graham, the father of index investing, “buy stocks like you buy groceries, not the way you buy perfume”.
Translation, most people buy groceries every week and probably buy more of a product if it’s on sale, right? Well, when the stock market has crashed, everything is on sale, so treat it like those avocados on special and buy more!
Because when the market recovers, which it will (and if it doesn’t then we are in big trouble), you will own more stocks for which you paid a lower price for.
Therefore, when the market rises again you will own more shares than you did previously AND you would have bought them for a lower price than most others who probably started buying when the stock prices began increasing.
Use news for information and not decisions. One aspect that I took some time getting used to was ignoring the media hype.
There are so many financial gurus out there predicting what might happen that eventually one of them will be correct one day, it’s a mathematical guarantee. Again, very few people can predict market movements and a lot of the time predictions are vague and unspecified.
Major news outlets like to produce dramatic articles with grappling titles but these typically have very little substance. You might be thinking this is all good and well but how do I know when to take notice, when should I listen?
I don’t know and If I did, I would be a millionaire already. Also note that past performance does not equal future performance, we tend to believe the psychological concept called **** (a name which I cannot bloody remember at the moment) that says when things are going well we assume this good fortune will continue.
Of course, this is not the case for investing, or anything for that matter. My approach relies on a longterm investment plan that can absorb market crashes because ultimately stocks on sale and a market recovery equals more money for you and me.
Don’t love your investments because they don’t love you. Friends of mine hold on to bonds given to them by their grandparents or stick solely to Apple stocks because they love Apple products (seriously).
Investing in stocks has to be unemotional and objective, it should be calculated and purposeful. Holding onto failing stocks that have sentimental value is like burning money, so get rid of them.
I take a minimalist approach to investing and attempt to maintain a tidy and uncluttered portfolio with a focus on index funds.
To summarise, unemotional investing is important yet understandably difficult and remember you can start small and build confidence.
Become a long term investor so you are able to take market lows and buy reap the rewards when it rises.
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This is not advice nor is it suggestive, it is simply a representation of what I do.