Financial literacy and knowledge of the basics of market functioning are only part of what a successful investor needs. What distinguishes an experienced investors from the beginners is the ability to control their emotions and not succumb to fleeting impulses. Why excessive emotionality harms the efficiency of work in the market, and what are the principles of the psychology of successful investors, we will figure it out further with The investment psychology.
The term of the investment psychology
Investment psychology is the nature of investment decisions, depending on the
market situation. In other words, it is a set of psychological reactions to events that
occur in the global economy and are reflected in the dynamics of the market. The
ability of an investor to remain calm and not panic in crisis situations determines
his or her psychological maturity as an investor. Only the one who keeps his or her
emotions under control and approaches the investment process, guided by cold
calculation, will be able to achieve success on the stock exchange.
Investors psychological profiles
The psychological profile of an investor largely depends on personal qualities. An
impulsive person is more likely to succumb to emotions than someone who is used
to weighing his or her decisions and acting with caution. The main psychological
profiles of investors are the following:
- Aggressive (impulsive) investor. He or she is impulsive and impatient. Such an
investor wants to get everything at once and is ready to take risks in order to make
profit. Aggressive investors rarely follow a long-term strategy. They simply do not
have enough patience to wait for the result of investments for the future. Therefore,
for such an investor, trading and speculation in the market is preferable to long-
term investments. Waiting for the stock to rise in value is not for them.
- Cautious investor. Such people have a calm, even melancholic temperament.
They are absolutely risk-averse and prefer to proceed with caution, calculating
every their step. The slightest changes in the market terrify them. Therefore, the
investment portfolio of such an investor is most likely to consist of reliable assets
with a minimum level of risk. Federal loan bonds, gold, and other stable financial
instruments. They prefer security and stability to a high level of return on
investment. Before making an investment decision, a cautious investor will
carefully analyze everything and consider alternative options.
- Flexible (pragmatic) investor. Such an investor has the qualities of the previous
two types. He or she is careful enough to act judiciously, but at the same time such
an investor will not weigh everything and hesitate for a long time. Pragmatic
investors soberly assesse the market situation, and if the circumstances seem suitable
for them, they ready to take risks in order to get the maximum profit. Such
people are able to control emotions and are guided by pragmatic considerations.
They find a balance between risk and reward and keep it fairly successful.
- Restless investor. He or she may have personal qualities that are inherent in any
of the previously listed types. Such an investor can be cautious and judicious,
impulsive and impatient, or even practical and capable of making informed
decisions. But no matter what strategy he or she adheres to, in any case restless
investor will worry about the effectiveness of the decision made by him or her.
Sometimes it may seem to the restless investor that he or she is acting incorrectly.
And then such an investor changes the tactics to the exact opposite, sometimes at
the most inopportune moment. The restless investor is the type who needs to learn
to control his or her impulses and control his or her emotions.
- Fast (spontaneous) investor. This type is close to the impulsive investor.
However, unlike this one, he or she is guided not by the desire to make high
profits, but by the confidence that the current moment in time is the most suitable
for the transaction. Even if analysts say otherwise. Fast investor loves fast trades
and fast trading and focuses on current market trends.
Personal qualities that hinder investors
An investor can have an effective strategy, be well versed in market trends and
trade nuances, but still sometimes make mistakes. This may be due to the presence
of a number of qualities that interfere with the process of trading and investing.
The main ones include:
- Self-confidence. This is excessive confidence in one's own strengths and abilities
to correctly assess the situation on the market. Overconfidence can lead to
irrational transactions. For example, an investor who is overly confident in his or
her ability to correctly analyze the market may purchase assets that in fact will not
bring him or her income.
- Uncertainty. This quality is the opposite of the previous one. An investor who is
not sure about everything, including his or her own analytical abilities, may miss
the opportunity to make a profit because of this. As long as uncertain investor
doubts and weighs the pros and cons, the right moment for the deal may be missed.
- Greed. An investor who possesses this quality strives to get as much profit as
possible. And he or she does not always do it rationally. Too greedy investot can
acquire a large number of assets regardless of risk and common sense.
- Inability to admit their mistakes. What distinguishes a professional from an
amateur in any business is the ability to admit his or her mistakes and learn from
them. Anyone who does not know how to do this will step on the same rake over
and over again. At the same time, the person with such drawback does not admit
that he himself is to blame for his failures, but will blame external factors. Such an
investor will sincerely believe that the broker, non-professional analysts, other investors, but not himself, are to blame for his or her losses. It is impossible for
him or her to admit that he or she did not check the information and made a
- Herd instinct. This is not so much a personal quality as a model of behavior that
arises among inexperienced players on the exchange. Many investors act according
to the principle: "Everyone bought, and I bought." And this is a completely wrong
position. It can be dangerous and costly to succumb to crowd sentiment.
How to avoid becoming a victim of your temperament
Personal qualities can get in the way of investing, so you need to learn to overcome
your prejudices and keep your emotions in check. Here are a few principles to keep
your temperament from getting in the way of effective investment:
- If you are a very cautious investor and not ready for even the slightest risk, then
gradually begin to deal with your fears. You should not go to extremes and
immediately acquire assets with a high level of risk. For starters, you can add a
little more risky assets to your portfolio, consisting mainly of deposits and bonds.
For example, shares of reliable issuers. They are more unpredictable assets than
bonds, but also more highly profitable. This will increase the potential return on
your investment portfolio and allow you to make sure that there is nothing to worry
about with a reasonable amount of risk.
- If, on the contrary, you are too impulsive, then try to approach your investments
more judiciously. If holding back your impulses is too difficult for you, you can
use the following trick. Keep a diary in which you will record your investment
decisions and the results to which they led. First, in the process of writing down
ideas, it is easier to analyze your actions and this can approach the issue from an
outside observer. And, secondly, writing down your decisions can save you from
- If it is very difficult for you to control your emotions, and you constantly suffer
losses because of this, do not rush to completely abandon investments and trading
on the stock exchange. Take advantage of automated trading or social trading
opportunities. Most trading terminals have algorithmic trading functions. For
example, the MetaTrader platforms that most traders use allow you to customize
trading robots. They will make deals according to the given algorithm.
Alternatively, you can connect to the trading signals of experienced traders who
can control their emotions and do not make irrational transactions because of them.
This can be done using copy-trading services (CopyMe, HeartBeat).