Investor Mind – Five mind tricks to make you a better investor

Being an investor is a tough time.

Millions will experience the pain of seeing their portfolios fall in value as most stock markets around the world have fallen this year. 

Investors will also experience a roller coaster ride of emotions following the extreme volatility that has occurred. 

There’re many practical steps you can take to protect your portfolio, as we’ve covered in the Wealth section in recent weeks. 

Measures such as ensuring balance – across all asset classes and equity markets – and maintaining low investment costs and long-term investment.

However, practical measures are only one part of the battle. Dealing with emotions is also necessary to stay on track during such a difficult time.

Louis Williams is head of psychology and behavioral science at financial software company Dynamic Planner.

He says: “Our emotional strength, confidence and optimism – no matter what is happening around us – are the keys to recovery and agility in these challenging times for investors.” 

William believes that investors who successfully navigate periods of financial turmoil share important characteristics. 

Here are our tips for developing the kind of thinking skills that will better weather any future investment storm.

1. Be comfortable with uncertainty

Investors have to calculate a seemingly endless list of unexpected events – from a global pandemic to the invasion of Ukraine and a rapid increase in prices. This lack of control and predictability can create anxiety.

The natural reaction would be to try to take control by selling investments and turning away from the chaos.

However, this simply locks in a loss and limits our ability to profit if and when the stock markets rebound.

So the key is to find other ways to cope with uncertainty. Instead of focusing on the latest twists and turns, step back and look at the bigger picture.

There have been many market downturns throughout history and prices have always rebounded. It may take a while – but recovery usually occurs.

Greg Davies is Head of Behavioral Finance at Oxford Risk Advisory Group.

He said: “In turbulent times, there is a huge gap between a decision that is emotionally comfortable for my short-term self-marketing – and a decision that is good for my long-term needs – continuity.

“As humans, we often deviate from good long-term decisions in pursuit of the emotional comfort we seek in the short term. It’s expensive – we’re effectively buying emotional comfort by delivering financial performance.”

But he believes that individual investors have one big advantage over professional investors: time. “Bad neglect—just letting things go—can be a very powerful investment strategy,” he says.

You can’t change the behavior of stock markets, but you can control how much you pay in investment fees and taxes. So make sure you use your allowances, such as an Individual Savings Account, which allows you to invest up to £20,000 tax-free each tax year.

2. Learn to control your emotions as Investor

It’s hard not to get caught up in the emotions of the ups and downs of the market. Portfolios are not just money, they are our way of financing dreams, vacations, helping our families and retirement.

However, emotions can sometimes cloud our judgement, such as being exaggerated when we are anxious.

If you have built a well-diversified portfolio over the long term, there is no reason to review it regularly.

Emma Maslin, financial coach and founder of personal finance website The Money Whisperer, says: “In a world where we’re used to checking our phone apps multiple times a day, it’s all too easy to become one. We are very careful about the value of our investments.

“But investing is long-term, and investors don’t need to check investments often, let alone several times a day. Maybe delete your investment app if you want to check it often and worry.”

Remember the good times too. The value of your portfolio may drop this year, but it’s likely to grow over the past three years. When viewed in the larger context, things may not look so good.

Clive Beagles is a senior fund manager at JOHCM UK Equity Income Investment Fund.

He says, “During market sell-offs, the natural human response is to short our time and focus on the short-term negative noise.

“It’s times like these when our instincts can lead us in the wrong direction that a well-established investment process helps avoid behavioral pitfalls.”

3. Boost your confidence as Investor

When the value of your portfolio falls, it’s easy to start seeing it as a reflection of your skills as an investor.

Lack of confidence in your financial plan increases the risk that you will start to tune out and get off track.

First of all, consider why you are making an individual investment decision. If your thinking hasn’t changed, you can be sure you’re still on the right track.

Also tired. When you read why your portfolio went down, you need to make sure that most investors are in the same boat.

4. Curb your impulses to trade rashly 

Investors often make the mistake of making rash decisions based on emotion rather than strategic thinking. That’s normal. However, there are things you can do to limit or prevent the resulting damage.

First, consider what motivated you to sell a particular investment. When you buy, are you interested, for example, because it’s the right investment for you, or because you’re afraid you’ll miss out on an opportunity where you’ll see others making a lot of money? Don’t let other people’s decisions hold you back.

Second, trickle money into your portfolio rather than adding lump sums. This way, you reduce the risk of falling in the market when you invest. It also saves you from trying to time the market, which is almost impossible.

5) Increase your stability with buffer Cash as Investor

Don’t invest the money you need quickly.

Falling markets are stressful enough, but when they wipe out the money you could have used to survive amid rising prices, it can be even more painful.

Before you put money into the financial markets, make sure you have a healthy cash safety net.

Before you start investing, you should have the equivalent of three to six months of cash outflows – or more if you’re using your investments for a living (such as in retirement).

By having a cash buffer, you don’t have to sell when markets fall and lock in losses.

Also pay off any unsecured debts. Debt reduction improves your financial stability because you are less exposed to risk if interest rates continue to rise – as predicted – or your income falls.

Also read: Money Saving Tips for 2nd Half year 2022

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