I have a subscription to motley fool news letter, not the paid ones but, the free ones where they send a daily teaser A headline like “This company is going to get the Walmart’s business away!”. Once you open the mail the only first few lines you’ll get to see are the great things this company is set out to do. To get more and to know the exact company you need to subscribe to the paid news letter. I know my friends who regularly make investment decisions based on those top stories about the next best stocks. When I last checked I was earning higher return on my investment than those friends. Enjoy this Guest post from Jon!
The media, including the news, is bad for your health. Many think that they need to watch the news or read magazines to stay on top of world events. But in reality, the media is costing you money. They do this by making you a bad investor. How do they do this and how can you fight back? Follow a proven strategy below and you will become a great investor.
Enemy #1 – Your Emotions
When it comes to investing, you greatest foe is yourself, or more specifically, your emotions. Fear and greed are the two main emotional players with regards to investing. With fear, we see the market dropping and get scared that we are losing money. We sell to stop the loss of our hard earned money.
The housing crisis in 2008 saw fear in the worst way. The stock market collapsed and most investors ran for the hills. Many still haven’t returned even though the market has returned over 130% since then. With greed, we see the market rising and don’t want to be left out. The dot com boom and burst of the late 1990’s saw this greed come to light.
Everyone was investing in internet based companies. It didn’t matter that most of these companies weren’t making any money, all that mattered was they were the next hot thing. I don’t know about you, but how can everything be the next hot thing? This shows how greed blinds us into making bad investing decisions.
How The Media Plays With Our Emotions
I personally enjoy watching the news after the stock market drops a few hundred points in a day. In fact, I make it a game. I guess at the language and the pictures they will use to sell their story. In many cases, I guess correct. You hear words like “plummet”, “disaster”, “collapse”, “crushed” and so on.
(Also Read – How to trade in Penny stocks for profit)
Then you will see how much a hypothetical 401k plan lost today because of the drop. On top of this, they will use images of people with sadness, loss and grief on their faces. Next time the market drops a good amount, watch the news and remember this post, I bet you can check off many of the items I just listed.
Why The Media Plays With Our Emotions
The simple reason the media does this is money. At the end of the day, the television networks and magazines need to turn a profit. For television, the more eyes that watch for a longer period of time, the more viewers they can claim to have. This means they can charge advertisers more money.
The same idea applies to print media. The more people that buy the magazine, the more they can charge for the ads within each monthly edition. So they make tantalizing headlines and illicit your emotions to hook you and pull you in. In a way, it is similar to a drug.
(Related – How to control stock trading impulses)
Even Wall Street itself plays into this thinking. All of the investment firms make money when you trade. The more you trade, the more money they earn. If you just buy and hold, then they aren’t making any money. By getting you emotionally involved, you tend to buy and sell more frequently, racking up the trading fees and padding their bottom line.
How To Overcome Your Emotions When Investing
So how do you overcome your greatest enemy when investing – your emotions – so that you can be a successful investor? Here are the 3 tips you need to follow:
Tip #1: Have A Plan
You need to create an investment plan. In fact, this is the first step in becoming a stock market millionaire. This plan will outline why you are investing and why you are investing in the allocation that you are. At the time you create your investment plan, you might not think it will be that valuable, but it is invaluable.
When the market drops and you get scared, or when the market takes off, your emotions are primed. By reviewing your investment plan, you remind yourself of your goals and why you are investing the way you are. This helps you to stay invested in bad times and not over-invest in good times.
Tip #2: Know Your Risk Tolerance
Knowing this is part of your investment plan above, but I wanted to talk about it separately. Make sure you truly understand how risk affects you when it comes to investing. Most risk tolerance tests ask you if you would be OK with your $10,000 jumping in value by $5,000 in a year. Of course everyone wants that!
What you need to focus on is the part about losing money. How comfortable are you losing money? Most people are not that comfortable and therefore should choose an allocation that is not very risky. By getting your risk tolerance correct, you greatly improve your odds of staying invested during the bad times.
Tip #3: Tune Out The Media
Tune out the outside voices trying to get you to trade more often and make bad investment decisions. Remember that they are all out to make a profit. Even the 24/7 financial news channels “experts” have an agenda. Don’t listen to them. The market always rises and falls. Over the short-term, the market tends to be more volatile and swing back and forth frequently.
But over the long-term, it smooths out and rises. By knowing that the media is just trying to get you to get emotionally involved, you can know that changing the channel or not picking up the magazine is in your best interest.
Tip #4: Automate The Process
Automating your investing is the best and easiest way to keep your emotions in check when investing. When your investing is automated, you buy regardless if the market is high or low. You don’t have to decide to invest or even remember to do so. It is already done for you. If you haven’t taken advantage of an automatic investing plan, it’s in your best interest to do so.
Emotions will always be tied to our money. That is just the way it is. When we understand how to manage these emotions, both internally and externally, we have a greater chance of success when it comes to investing. Take the steps needed to manage your emotions and you will become a great investor.
About the : Jon writes at Money Smart Guides a personal finance blog that helps readers get out of debt and begin investing for their future. There you will find simple, straight-forward advice to take control of your finances and reach your financial goals.