I remember personal finance article published in a leading business daily a couple of weeks ago. It says like this, “anywhere in the world a SALE announcement is always associated with thronging crowds in a rush to grab their purchase….” This phenomenon is witnessed across the industry segments including apparel, groceries, and consumer durables where a sale is seen as an opportunity to grab their pick before the potential price rise that is yet to follow.
BUT, when it comes to managing money, particularly in the stock market context, a sale is not considered as attractive as in retail and consumer goods segments. On the contrary, here people perceive a sale as a threat (despite the similar attribute of uncertainty in price rise). Hence, investors in stock market would get swayed away by their sentiment and instead of exploiting the opportunity of buying more at cheaper prices (prices are usually low during massive sale), investors tend to liquidate their holdings (fearing that prices may go down further and thereby causing loss; at the same time ignoring the possibility of prospective rise in prices).
On a similar notion, when prices move north, investors exhibit their greed and expect that prices will go further (again ignoring the fact of possible decline in prices). Their hope mixed with greed drive their emotions which in turn make them purchase stocks at higher prices. Here they are buying at high prices under the grip of greed. Previously they are gripped by fear and selling cheaper and even making losses, by following the crowds.
It is, therefore, called that GREED and FEAR are the two monsters playing their ill-will in investment decisions. Taming both of these demons by way of controlling the emotions is the best way to churn out the real benefits from your investments in stocks.
Controlling greed and fear is the most difficult aspect when it comes to managing your money. It is a slow process learnt with great patience and following sound practices. Here I would repeat what the great researchers in Behavioral Finance have to say: Do not Follow the Crowd, and Stay Diversified.
Remember, Rome was not built in a day, and so will be with your wealth. Fortunes are built patiently over a period of time and often you need to wait and watch your investments. Diversifying your investments is also a great tool of controlling your emotions: while equities will satisfy your greed for higher returns, bonds will keep your fear under check.
So, greed and fear cannot be easily kept off your heart and mind, but controlling them in suitable context will certainly help reach your investment goals.
Filed under: Behavioral Finance |