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Follow A System (Not Your Emotions) When You Invest

12934 Views | June 19, 2019

When the markets are falling, investors are often hopeful that things would become better and the stocks in their portfolio will regain their lost value. On the other hand, in a rising market, they become fearful about losing out on the profits they have gained, and sell their holdings too soon. Hope and fear are both common emotions found among investors, which results in making mistakes in their investing decisions. On the other hand, information and knowledge are weapons that investors can use to overcome their fears and relinquish the need for hope alone.

You need to break these bad habits

The underlying problem is not the emotions, but rather the lack of background knowledge and information. Armed with knowledge, you will not fall prey to hearsay and unsolicited advice. Historical research can give you insights in the workings of the markets and improve your understanding, but more importantly, it will help you break free of the bad habit of falling prey to your own and other people’s emotions. These habits come in many forms and shapes:

  • Picking “cheap” stocks: Many investors favour “cheap” stocks; for instance, if a stock costs Rs.10, you can buy 10 shares for Rs.100; they would rather buy this stock than a stock that costs Rs.100. They often disregard the fact that most higher-priced stocks belong to sound companies with good business fundamentals.
  • Falling in love with your stocks: Holding on to your stocks through thick and thin, hoping for a miracle, is the undoing of many investors. Instead, formulate buying and selling rules based on fundamentals and stick to them.
  • Ignoring history: Not doing due diligence, and instead, choosing to follow the herd could be perilous. It’s important to study and understand the stock’s past performance, its implications on its performance going forward and its strengths and weaknesses before making your investment decision.
  • Not monitoring your investments: After you have completed the trade, you should conduct periodical post-analysis to see if the trade was a failure or a success. Learn from your mistakes and take corrective steps.

Devise a system that you can follow easily

Whether you are a new investor or a seasoned one, formulating a system that you can follow without exception will make you more disciplined and less prone to resting on hope or being driven by your fear. Some steps that you can take are:

  • Set a threshold: Normally you should look at purchasing shares of only quality companies with large or mid-range market capitalisation. These stocks may appear to be expensive per unit at first glance, but will eventually generate attractive returns over the mid-long term investment tenure. Avoid ‘penny’ stocks.
  • Examine the market breadth: You should analyse whether the market is headed up or down, and learn how to recognise the cycles. Knowing which direction the market will take opens up a window of opportunity.
  • Be honest: Keep your realisation targets at a reasonable level and do not fall victim to your own greed. When you realise your targets, be prepared to sell.
  • Keep track: Write down your trades and maintain an investment dairy so that you know exactly how each trade went over time. These days, there are many websites available online that can help you do that as well.
  • Learn from the past: When you analyse past winners, you will get a glimpse of tomorrow’s potential stars. Never ignore history.

It is easier said than done to be objective, but setting a few parameters is helpful for investors. When you overcome your fear and greed, you will gain new confidence. Now is the time to learn from past mistakes and build a new investment strategy. Learn the essentials of successful investing. Get to know about StockAxis comphrenshive advisory services. Happy investing!