Investing in the stock market has its ups and downs. And it’s not just because the stock market is unpredictable. It’s easy for individual investors to get tripped up by the psychology of investing. Investors need to be aware of these four common behaviors and plan accordingly:
1. Eternal optimism. When money is involved, it’s tough to keep feelings in check. It’s completely normal—even expected—to believe your stock will go up in value even if it’s heading in the other direction. The problem is that wishful thinking can keep you in the game when you may want to be calling it quits.
2. Herd instincts. Individual investors tend to follow the crowd, buying popular stocks (perhaps influenced by a mention in the news or a friend’s recommendation) and selling when they see others cutting loose. The wise investor bases decisions on sound research, not the crowd mentality.
3. Fear of failure. No one likes to lose, so investors often delay the sale of a losing stock and instead sell winners (thinking they’re smart to turn a profit). Savvier investors know how to turn a losing stock into an advantage by selling it to offset gains and reduce their net tax bill.
4. Super ego. If you think you can beat the market, think again. Timing the market is a strategy that doesn’t work well over time. Even if you do get lucky once in a while, it’s pretty unlikely you will get better overall results buying and selling stocks than the institutions that employ sophisticated software models, closely monitor market trends, and have entire departments devoted to stock market analysis.
The bottom line? Forget about outsmarting the market and resist the urge to do it all yourself. Instead, seek advice when it’s time to invest. Focus on making investment decisions that are aligned with your long-term goals and are backed by experience, research and insight.