4 Ideas to understand your Investing and Behavioral Risk

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Avatar for merurial9
3 years ago

So, you bought that crypto and expected it to MOON. It’s a good day when it goes up, if it goes down, it clouds your mood. Today, it’s down 12%, maybe it’s time to sell? You sell the $hitcoin and buy into another coin that you expect to Lambo. Within a few months, you’re disappointed again—the cycle repeats.

To pick a winner and have it MOON is rare and happens only by dumb luck. I dusted off a book that I read a year ago, The Laws of Wealth by Dr Daniel Crosby. Dr Crosby emphasizes that effective investing has less to do with being a Wall Street genius and everything to do with human conduct. The concept of behavioral risk is introduced as a companion to the familiar risk concepts, systematic risk and unsystematic risk. The book analyzes faulty behaviors and the actions to avoid investing failures.

Thinking

What sets us, humans apart from other mammals is the ability to think, and to think into the future. 

Unfortunately, our brains are pessimists. Because the human brain spends one of every eight hours contemplating the future, this leads to an obsession with adverse events striking us down. The predisposition to negativity affects investing decisions when it becomes the prelude for hasty decisions.

The Most Feared Concept in Investing

One obscure reality that requires acceptance is that corrections and bear markets are part of the investment landscape. When the market nose-dives, the natural reaction is to ditch everything. That’s the herd mentality. Try this instead: realize that it represents a golden buying opportunity.

Take this sharp right – create a list of cryptos to buy when a bear market occurs. I like this idea because it removes the anxiety associated with a pending market decline. The concept gives permission to work up some excitement for the next correction, not fear it like the next plague.

Apply goals-based investing

Researchers found that of a pool of clients that focused on goals-based investing, 75% made no changes to their assets while 20% increased the size of their immediate needs pool but left their long-term assets fully invested. Clients with a traditional investment portfolio fully liquidated their holdings at least once, even when they didn’t need the money, and 10% made significant changes (25% or more reduction) to their equity allocation.

Curbing Your Emotions

Here’s something you might not want to hear. The hard truth is, emotions dictate investing and emotional investors run the risk of ending up broke. Successful investors have learned how to contain their emotions and remain rational. If you are incredibly passionate about money and if “Don’t Sweat the Small Stuff” did nothing to quell your hair-trigger reactions, stay away from crypto investing. It’s not for you. A passive investment, like an index fund, would suit you better.

Another virtue will come in handy – patience. Over time, an impatient investor will experience more losses from perpetually making rash decisions. You don’t want this to be you.

Challenge yourself to rein in poor habits

Try some of these suggestions and see if you can work them into your investment mentality:

  • Offset overconfidence by sticking with your plan

  • Don’t try to predict the future, but prepare for bad times

  • Don’t expect permanence; whether in good times or bad, ride the waves

  • Manage risk by studying fundamental factors

  • Measure performance against your own gains, not others’

There is no escaping the fact that managing human behavior is the key to being a successful investor. 

No level of investment skill, which is rare on its own, is sufficient to overcome debilitating behavior.

Where can you improve your investing behavior?

Thank you for reading and hope you have a good rest of the day!


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Avatar for merurial9
3 years ago

Comments

Systematic Risk can be managed by diversification and Unsystematic Risk can be managed only by very deep knowledge. Most of persons want to become Rich overnight, so they are mostly dependent on Technical Analysis, which is guided by human emotions. True Investor's focus on both Fundamental Analysis and Technical Analysis, so they normally able to make profits.

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3 years ago

Great information - thank you for reading and commenting.

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3 years ago

Your welcome

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3 years ago