Emotional traps in Investing

7 Emotional Traps In Investing, And How To Avoid Them

There are many emotional traps thatpeople fall into when it comes to investing. These traps lead to poorinvestment decisions, or worse yet, not investing at all!

If you aren’t investingin the stock market, or are having very little success, one or more these sevenemotional traps are probably at the root of your problem.

1.Financially Illiterate

It’s amazing how manypeople start investing without reading any type of literature on the subject.

They go to their broker.Invest in anything and everything that he/she tells them to. And then theythink they are doing smart investing because their broker is in charge.

People don’t seem tounderstand that brokers are not out to make you money. They are out to make themselves money. The wealthiest brokers are gifted salespeople.They will tell you anything and everything that you want to hear, as long asthey can make a profit out of it.

How To Avoid: You really only need to read a coupleof books on investing to become a sound investor. And of course, you can callus any time and we will make you literate enough to start investing in stocks –it’s not a very tough task.

2.RecencyBias

The stock market is agame of opposites. When stocks are doing really well, chances are they aregoing to go down. And when stocks are doing poorly, thechances are that they are eventually going to go up.

People seem to get thisconfused on a daily basis. A financial advisor once explained this conceptperfectly to me…

When you go to the mall and visit yourfavorite clothing store, do you buy all of your clothes when they are chargingthe maximum? Or would you wait until they are having a big sale? Well, when thestock market is doing poorly, it’s kind of like they are having a big sale.It’s much better to invest then instead of when the stock market is booming.

If the stock market istoo good to be true right now, it’s probably going to crash. This is whathappened at the end of the roaring ’20s. It’s also what happened during thelate 1990’s and early 2000’s with the dot-com bubble. Be aware of this so youdon’t fall into the recency bias trap.

How To Avoid: Never forget that today’s resultsmean nothing about what will happen tomorrow. Even the most successfulinvestors such as Warren Buffett admit that they have no idea what the stockmarket is going to do in the future.

Don’t worry about what the stock market is doing today. Instead, thinkabout how you can come out ahead 5, 10, or 15 years from now. Then, forgetabout it! Let everybody else do all of the worrying for you.

3.HoldingOn For Dear Life

Some people refuse to sell a stock until they have at least made some kind of profit from it. When the stock they invest incontinues to plummet, they ride it out to the end.

As a smart investor, it’s sometimesthe right decision to sell and cut your losses. Nobody is ever 100% right, sounderstand this and don’t let your ego get in the way.

How To Avoid: The best thing to do is to implementa strategy before you start investing in something. Say to yourself, “Iam going to sell this stock if it gets down to X amount.”

By doing this beforehand,you have made a firm commitment to yourself and will prevent you from losingmore money than you should.

4.Overconfidence

Here’s another emotionaltrap that gets a lot of people into trouble. They make some wise investments,then they get a little cocky and start to invest more than they should. Thenthe market changes and they are suddenly brought back down to reality.

Just because you mightbe having some success doesn’t mean that it will continue. The stock market isunpredictable and nothing is a sure thing. Especially when it comes to shortterm investing.

How To Avoid: Never forget that there is no way ofpredicting what future stocks will do. No matter how good it sounds, or howgood the economy is, the stock market always has a way of balancing itself out.

5.FearOf Loss

I would say the biggestreason that people don’t start investing is because of the fear of losingmoney. They have this idea in their head that the stock market is a scam andthe only way to make money in it is if you live on Wall Street and study stocksall day long.

Nothing could be farther from the truth!

Believe me, you don’thave to be smart at all to make a lot of money in the stock market. In fact,often times the less you know, the better off you are! This is because thereare some common sense strategies out there that basically guarantee you come out ahead with investing in the long term.

How To Avoid: There is always a chance when youinvest that you will lose money. But don’t let that bother you.

If you look at thehistory of the stock market in 15 year intervals, everysingle time it has went up! Duringthose 15 year intervals, there might be a few years where it goes down. Butwhen all is said and done and the 15 years is up, the stock market goes up.

6.ObligationToward Your Business

For many people, the onlytype of investing that they ever get into is purchasing stocks in theircompany. While this strategy works well for somepeople, it’s not a good strategy foreveryone.

There are better (and safer) ways to invest than just owning stock inyour company.

Don’t feel obligated inany way to own stock in your company. Smart investors look at companiesentirely for what they are and their potential growth. If you aren’t 100%confident in your company, why would you invest in it?

How To Avoid: Unless you are the CEO and have acommanding influence on what goes on, there is no real advantage to owningstock in your company. Instead, educate yourself in the field of investing soyou can make wise decisions on where to put your money.

7.OverAnalyzing

Many of us have atendency to over analyze because it can at times seem so complex. We say toourselves, “I don’t want to invest in this until I am sure it is 100% safe.”

The problem with thisis that day will never come! You will eventually stop analyzing it and forgetall about it. This is a serious mistake when it comes to investing.

In order to be successful, you needto get started as soon as possible!

How To Avoid: Understand that with investing, thesooner you get started, the more money you are going to have in the long run.

Don’t get in the habit ofover analyzing and letting fear take over. Yes, there is a chance you will losemoney. But in the long run, there’s a muchbetter chance you will come out ahead…

Way ahead!