When you invest in the stock market, you are ruled by two important emotions: greed and fear. And if you give in to these two sentiments, it can have a disadvantageous and intense impact on your stock market business.
Fear is defined as an unpleasant, often strong emotion, of anticipation or awareness of danger, according to the online dictionary.
When stocks experience increased losses for a continual period, the overall market can become more fearful of supporting further losses.
Low-risk and low-return securities
In a bid to curtail their losses, shareholders hurriedly move out of the equity (stock) markets in search of less chancy buys. Cash invested into money market securities, stable value funds and principal-protected funds – all which are low-risk and low-return securities.
So basically, investors and financiers threw their long term plans out the window because they got scared; the dread of more and continuous losses was too much to bear.
Of course, losing a huge segment of your equity portfolio’s worth is a tough pill to swallow, but even more difficult to digest is the notion that the new instruments that initially received the inflows have very little chance of ever rebuilding that wealth.
Getting rid of your investment plan
Just as getting rid of your investment plan to jump on the latest get-rich-quick investment can cause a huge rift in your portfolio, so too can getting swept up in the established fear of the overall market by switching to low-risk, low-return investments.
But of course, all this is just easier said than done. There’s a very thin line between controlling your emotions and being just plain obstinate. Bear in mind also to re-evaluate your investment strategy and agree to yourself to be flexible to a point, and remain balanced when making decisions to change your plan of action.
Whichever emotion is widespread in the existing market, it is essential to stick to the necessary essentials of investing in order to survive. It is important that you set up an appropriate asset allocation mix that is devoid of emotion.
Opposed to high-risk investing
If you are opposed to high-risk investing, you might be more vulnerable to a fear-dominated market. Therefore, your partaking in equity securities should be lesser than investors who are more tolerant of risk.
The bottom line is that you are in charge of your portfolio. You are accountable for the judgments you make as well as the increases and decreases you experience.
Sticking to a strong investment strategy involves keeping your emotions, not blindly going after the current market sentiment, and staying within your investing comfort zone. This is a balancing act and required skill that can be practiced only over time.
Having faith, plus making smart investments is the only way to have a career in the stock market or make a gain from it.