Becoming a Successful Investor - (the role your emotions play)

Is it too much of an understatement to say that the last few years have challenged investors emotions? One day the stock market roars ahead, the next day it takes heart-stopping plunges. In October 2007, stock market indices reached new all-time highs only to plunge in the next 18 months to lows not seen for several decades. Those were times which tested investors commitments to their long-term investing and retirement plans.

When has it ever been different? When has the opportunity for significant gains in the market not been preceded by months of despair and discouragement for investors? There is an old stock market saying that “the market climbs a wall of worry.” When things look uncertain, discouraging, and their darkest, the stock market is more often than not about to reverse course and make some unexpected gains. It’s not unusual for stocks to achieve 40 to 60 percent of their bull market gains during the first few months of a new bull market. The average bull market lasts about three years - time enough for investors to feel good about their investments and commitments to their long-term investment planning.

At market peaks, everything looks rosy. Everyone is optimistic as stocks continue to move higher, that is, until some event triggers a rush for the exits. Eventually, the media discovers and disseminates the news that something unexpected has occurred - maybe a high-profile company has announced an unexpected loss in profits or sales, or an unexpected social or political event has occurred. The key word here is unexpected. Something has changed the outlook for a continuation of smooth sailing and the media has taken notice. The word is out. Eventually, panic permeates the financial world and the markets plunge. Our emotions swing to fear.

So what is an investor to do? The most important concept that a successful investor can learn is the role his/her emotions play in investment decisions. We must realize that we are wired emotionally to swing between fear and greed. When we let our emotions drive our investment decisions, we will always buy when it is emotionally comfortable and sell when we fear the future - we will buy high and sell low. Obviously, this pattern will guarantee that we become unsuccessful investors, discouraged, and retreat from our investing efforts.

Investment advisors explain the benefits derived from portfolio diversification and asset allocation, but usually little or no effort is made to help clients understand their own emotions and the critical role emotions play in successful investing. If the asset allocation of an investor’s long-term investment plan does not take into consideration the individual’s emotional triggers, the plan may be jettisoned at the most critical time for achieving success.

InvestorTrainer.com and most investment/financial education organizations, teach the benefits of planning using diversification and asset allocation. But without understanding your normal proclivity for fear and greed, the best investment plan you can design will be reduced to emotional ashes when the markets turn. InvestorTrainer.com is committed promoting financial literacy and teaching investors to recognize and control their responses to market fluctuations.

Changes in market direction will occur every few years - this will continue as long as we have free markets.

Therefore, as a first step to becoming a successful investor, it is important that you take the time to understand your emotional responses to the fluctuations in the financial markets and recognize how you handle fear and greed. The successful investor will recognize when his/her emotions are kicking in, and keep them from influencing his/her investment decisions.

For additional insights, review Fear & Greed in the Principles for Successful Investing section on this website and Chapter 2 in Investing for Retirement - Surviving a Financial Tsunami.