Are investors emotional or balanced in their investment decisions? Let's take a look.
The complexity of investment decisions has always made me feel whether investors make objective and balanced decisions or are they converted by their temporary emotions and psychological situation.
The study of behavioral finance or how emotions and psychology influence the way investors invest make me appropriately think, 'We can take the horse to the water, but can never force it to drink'.
Even investment advisors can guide, but can never rule over investor’s emotions, and such emotions influence the wrong or right choices they make, as also other investors decisions for wealth creation.
Here's an overview of common irrational investment behaviors or six deadly sins that can destroy wealth.
It is quite right, these investors think, to follow what others do, and they do not use their own caution or rationality. They just follow what others do and just get pushed into the river as the rats with Pied Piper.
This behavior pressures market trend of investments greatly with sudden crashes after a rise, with certain wise and clever investors like the Pied Piper making huge wealth by selling at the right time.
2. I always know and knew everything
I-know-everything attitude can prove to be as destructive to wealth creation as following the Pied Piper.
It is true that just dictators like Hitler had a great fall due to lack of accepting public opinion, lack of humility and patient analyses by conversation and practical thinking makes these investors dig their own grave with their investment decisions at times.
3. I have always held these shares and they can be good
This behavior of holding on to something known, for fear of the unknown just like a baby holding on to his/her mother on the first day of going to a pre-school, is bad, as even a child realizes after a few days in school.
Similarly holding on to certain investments because of the low price-earnings ratio, or being well-known companies may prove wrong when the company is sinking.
It is true this chronic attaching, without a fresh look at your investment decision based on the play of market forces could even make one suffer huge damages.
4. I will not lose; it will pass
To avoid surgery just because it may be a failure, or it is better to wait and watch is just like holding on to shares of companies running at a loss with the hope things would improve. It is possible that such good times are just an illusion, making one suffer bigger losses and greater psychological impact on your life.
Hence an inclination to learn and grab basic investment principles and wisdom to judge the nature of share price decline, whether it is temporary permanent can help make a wise investment decision.
5. Making a mountain out of a mole-hole
Rationality escapes investors' minds, which overreact to good and bad news.
The recession during 2008 made most of the investors overreact by selling their shares and mutual fund units thinking that the recovery will take a longer time and they lost in the bargain.
Similarly, sometimes certain dodgy investors spread wrong news about the profitability of certain ventures, with amateur investors overreacting and investing all their savings in dubious ventures.
The only advantage that such overreaction has given is when one gets to invest in good value shares that appreciate in the long run.
6. Sentimental and emotional attachment to the holdings
At times investors become sentimental with a particular share or a portfolio and don't sell those shares in any situation. One classic example is inherited investments.
Some other based and baseless investment behaviors
Look out for certain other investment behaviors like:
• Attachment to certain investments of a similar nature
• Comfort zone for certain familiar set of investments
• Investments based on recent favorable or unfavorable happenings in the market
These attitudes will make you biased in taking investment decisions. So you need to be more careful in dealing with these attitudes when taking investment resolutions.
The ultimate word
These are just guidelines for rational and goal-oriented investment decisions.
Related Topics :
- Common Mistakes to Avoid When Stock Markets Fall
- Protect Yourself from Bad Stock Advice
- Proper Methods for Trading
- Where to Invest for Better Returns
- 10 Ways to Make Money in Stock Market
