Three reasons why you can’t invest and make money
The stock market is the only market where things are sold at a discount, and everyone is afraid to buy. That may sound ridiculous, but it’s exactly what happens when the stock market drops even a few percentage points, as it frequently does. Investors feel frightened and sell in haste. When prices rise, though, investors rush in. It’s the ideal scenario for “buying low and selling high.”
To avoid falling into either of these extremes, investors must first comprehend the common lies they tell themselves. Here are three of the most important:
1. ‘I’ll hold off on investing until the stock market is safe.’
When investors are too hesitant to buy into the market after stocks have plummeted, they utilize this argument. Maybe stocks have been falling for a few days in a row, or maybe they’ve been down for a long time. However, when investors say they’re waiting for it to be safe, they’re referring to a price increase. So, waiting for (the perception of) safety is just a method for investors to wind up paying greater prices, and it’s often only a perception of safety that investors pay for.
Fear is the motivating emotion, but psychologists refer to this more particular behavior as “myopic loss aversion.” That is, investors would rather prevent a short-term loss than attain a longer-term gain at all costs. So, if you’re hurting because you’ve lost money, you’re likely to do everything to stop the agony. So, even when prices are low, you sell stocks or don’t acquire them.
2. ‘Next week, when it’s cheaper, I’ll buy back in.’
As they wait for the stock to plummet, would-be buyers utilize this argument. However, as the Putnam Investments data demonstrates, investors never know which way equities will move on any given day, particularly in the short term. Next week, a stock or market could easily climb or collapse. When stocks are inexpensive, smart investors acquire them and keep them for a long time.
What causes this behavior to occur: It could be a result of fear or greed. The scared investor may be concerned that the stock will collapse before next week and waits, whereas the greedy investor anticipates a decrease but wants to buy at a much lower price than today’s.
3. ‘I’m sick of this stock, so I’m getting rid of it.’
Investors who require excitement from their investments, such as action in a casino, use this reason. Smart investment, on the other hand, is tedious. The finest investors hold their stocks for years and years, allowing their profits to grow. Investing isn’t usually a quick-hit game. All of your gains come from waiting rather than trading in and out of the market.
An investor’s craving for excitement is what drives this behavior. This desire may be driven by the erroneous belief that successful investors trade every day to make large profits. While some traders are effective at it, they are also relentlessly and rationally focused on the end result. They don’t care about thrill; they only care about getting money, therefore they avoid making emotional decisions.
Individual stocks or index funds?
If a ten percent yearly return seems appealing, consider investing in an index fund. Because index funds are made up of dozens or even hundreds of equities that replicate an index like the S&P 500, you don’t need to know much about individual firms to succeed. The ability to stay invested is, once again, the key to success.
Yes, individual equities have the potential to produce far larger returns than index funds, but you’ll have to put in some effort to research firms to do so.