Investing is an excellent way to build wealth. It’s a way to make your money work for you while you use your time for the things that are most important to you. I mean, how amazing will it be for you to enjoy a dream vacation with your family while still making money? Well, that’s entirely possible with investing. However, only a few investors understand what it takes to be successful so here are 7 psychological tricks I’ve used and many investors use to get ahead when investing!
Trick #1: Risk only what you can afford to lose
The first thing that every investor must know is that investing involves risk and risk simply means that you cannot predict what the outcome of an investment will be. Investors are rewarded according to the amount of risk they are willing to take. In other words, every investor knows there is no assurance that they’re going to get back the money they’ve invested. Therefore, the first psychological trick you must learn as an investor is to risk only what you can afford to lose.
Furthermore, you need to know that investing is not a get-rich-quick scheme. One of the important virtues you need as an investor is patience. However, you may find it difficult to be patient when you’ve invested more than you can afford to lose. That’s when you see investors panicking after a short time because they expect to make money quickly.
According to Warren Buffett:
“if you’re not thinking of owning a stock for 10 years, don’t even think of owning it for 10 minutes.”
That is to say, you’re not going to double your money overnight so don’t invest more than you can afford to lose.
Again, you’re more likely to make wrong investing decisions when you invest more than you can afford to lose. List out the top 5 things that you’re worried about right now and I can bet some of them involve money. Money is deeply connected to our emotions, to a deeper degree than most of us could ever imagine. So when you invest more than you can afford to lose, you’re likely going to become worried and make the wrong decisions. For instance, if all you have is $10,000 and you decided to invest it then you wake up the next morning to discover the market is down by 10% and your investment is now worth $9,000, what would you do? Because this is all the money you have, you would likely panic and sell your holdings to mitigate further loss. However, real investors understand that dips are part of investing and I will get into that a little later!
Trick #2: Take small steps at the beginning
As a new investor, you’re motivated and you’re ready to give it your all. However, you must learn the trick of every successful investor and start by taking small steps in the beginning. Every expert today was once a beginner so it’s okay if you don’t know everything about investing. Be willing to have a big ambition, start small, and learn as you invest. Let’s consider the world’s fastest man today. Can you imagine him winning that title when he was just 2 years old? I doubt if he could win the title when he was 10 years old either.
However, with consistent practice, he became better and when it was time, he appeared before the world to claim the title of the world’s fastest man. The same thing applies to investing. You don’t become the best investor on your first day. You only become better with time by understanding the basics of investing. Most big businesses today started with small branches and most big investors today started by taking small steps in the beginning. Therefore, you should start by investing a bit of money in different sectors. Your goal at this stage should not be about making money but learning as much as you can. Most new investors lose money because they don’t understand the basics. However, by starting small, you could learn how to invest profitably by understanding the different sectors while taking on minimal risk. Remember, one of the reasons why top investors are successful is because they only invest in what they understand.
Trick #3: Protect the principal
One other thing that makes new investors fail is they don’t know how to protect their money. There are two important rules of investing and the first one is “never lose money.” The second rule is never forget rule number 1. That is, if you want to become a successful investor, be like others and don’t lose money.
So the next question you may have is “is it possible to not lose money while investing?” Yes, it is possible and I’ll show you how to do that. Every great investor has a goal before investing in a particular asset. If the outcome of their prediction is right and the value of their asset goes up, they don’t become greedy. Even when the value of their asset seems to increase indefinitely, they are not tempted to keep it once they’ve achieved their goals. They take the profit and protect their initial principal.
Therefore, as a new investor, you must learn to protect your capital by taking profit when your portfolio increases. Remember that no one can predict the market accurately. However, when you protect your principal, you’re likely not going to be worried about the outcome of the market and you could make more money.
Trick #4: Keep greed at bay
Let’s face it, humans are greedy. I know it’s hard to accept but it’s the truth. We all want more for ourselves and there’s nothing wrong with that. However, when it comes to investing, another important trick you must know is to keep greed at bay. Some investors are always looking for the “hot stocks” with large gains but the truth is most people lose money rather than gain with such investments. For instance, there are stories of several gold rushes in history. However, most of these stories always end up the same way. The mining will be unprofitable for many people and only a few will eventually become wealthy. One of the most important investing quotes is:
“Be fearful when others are greedy. Be greedy when others are fearful.”
This implies that you shouldn’t allow other people’s greed to influence your decision investing decisions. Generally, when a price of a stock is high, it’s only the early investors that benefit. If you develop the fear of missing out, you are likely going to buy an overpriced stock and the result could be a loss of your capital if the stock crashes. Therefore, you have to be very careful when investing so you don’t end up wasting money thinking you’ve hit the jackpot.
Furthermore, this is not to say every “hot stock” or an investment that promises large gain is a bad investment. However, what you should know is when an investment sounds too good to be true it probably is. What you should do instead is do your research and find out as much as you can about a particular investment before making any decisions. Remember to have a goal before investing and keep greed at bay so you can turn a profit.
Trick #5: Use Losses To Your Advantage
Some investors face intense shock when they lose money because they believed that they’ve done enough research before investing. However, no one controls the market and even the best investors are not always accurate with their predictions. Losses are part of the game and the earlier you learn about this the better. Another important trick you must know as an investor is to use losses to your advantage. Learn from your losses and understand that absolutely no one controls the market! Your best predictions could go wrong and you may lose money.
Furthermore, what you should do, as an investor is not to overlook your mistakes but sit down and analyze them. List out the things you think went wrong and find possible solutions to them. It’s not enough to avoid these mistakes the next time, you must also learn from them. For example, list if you bought a stock because of news that you read on a forum from an unqualified financial advisor. The solution may not be to avoid the forum but rather to screen the information you believe in and do your own research.
Another way to use losses to your advantage is to diversify your portfolio. It’s not enough to invest in different companies; you need to also invest in different industries. For instance, Apple and Microsoft are both in the same industry and there is a high probability that what affects one will affect the other. So you could invest in a tech company and transportation industry, for instance, to spread your risk. Again, don’t just depend on what you think you know. Learn from experts with proven records of success to improve your chances of success as well.
Trick #6: Never tell yourself “if only”
Did you miss the initial public offering of Amazon when one share was worth $18? Well, many other investors did, too. Or maybe you sold a stock too early like the person who sold his 10% stake of Apple for $800. No matter how well you research, there are times when you’re going to make decisions that will make you say “if only.” “If only I had bought more of these stocks earlier,” “If only I didn’t sell when I did,” “If only I was more patient.”
Well, you don’t have to waste your time thinking over “what ifs”. What if you bought the shares and the company went out of business in few years. What would you do? What if you didn’t sell the shares and it later became valueless? So you see, it doesn’t make sense to waste your time thinking about lost opportunities. Instead, you should focus on what you have and how to make better investments in the future.
Again, it’s okay if you don’t make a particular investment no matter how good it seems. If you don’t believe in a company in the first place, then it’s probably not a good investment for you no matter how much money could be had. There will be more IPOs as long as the market exists. Who knows, you may be lucky and buy the next Amazon or Tesla.
Trick #7: Understand dips are part of investing
If you’ve ever seen a stock market chart, you’ll notice there are reds and greens. Most investors like the greens because it means profit for them while they hate the red because no one loves to lose money. However, it is impossible to have gains always without experiencing dips from time to time.
Throughout history, there are records of stock market crashes but one important thing you must note is, investors who didn’t sell during these periods eventually had their money back and even made a profit. Experienced investors understand that a market dip presents them with an opportunity to accumulate more stocks at a cheaper price. Therefore, you should not sell your stocks when there is a dip to avoid losing money. For example, you’ve lost money if you bought a stock for $100 and sell it for $85 during a dip. However, if you hold it long enough, you could eventually make a profit when the value of the stock recovers and begins to grow over time!
There you have it, 7 psychological tricks you need to know to succeed in the investing game!