When we think of investing, we often assume that what we think and feel has very little to do with how a portfolio does. However, this isn’t the case. While you can’t control the market, the reality is that you can control your mindset.
And sometimes your mindset influences your reaction to what is happening with the markets and with your portfolio.
Here are some of the ways your mindset can influence what happens with your investment portfolio:
Giving into Panic Then Selling Low
One of the most dangerous mindsets to have, while you’re investing, is that of fear. When you’e in a state of fear, your ability to make good decisions is compromised. This is especially true if you allow panic to lead you into selling along with the herd during a market crash.
When you sell because you are afraid of market performance, you run the risk of selling low and locking in your losses. Instead of selling because you’re afraid, take a step back and examine the fundamentals.
If the fundamentals haven’t changed, chances are the asset will recover once the current volatility smooths out. Change your mindset a bit, you can avoid making a big mistake.
Overconfidence in Your Abilities
While you don’t want to let fear lead you into selling low for no good reason, you also don’t want to be overconfident in your abilities and make big mistakes as an investor. This type of overconfidence can prompt you take bigger risks than you can tolerate, sure that your investing genius will save you.
Watch out, too, for biases related to overconfidence. These types of biases, such as only paying attention to information that supports your position, or believing that any good outcome is entirely a result of your prowess, can lead you to have greater confidence in your abilities than is warranted.
Be aware of your growing confidence, and look for ways to keep it in check. You don’t want to be too unsure, but you should also have a healthy skepticism of your sheer genius as an investor.
Being Too Risk Averse
In some cases, it’s possible to be too averse to risk. While you want to practice risk management in your investing choices, you don’t want to be so risk averse that you’re unable to effectively build your wealth.
The reality is that cash investments — even though they are safe — just won’t cut it when it comes to wealth creation. The return is so small in many cases that you are lucky if you manage to keep pace with inflation.
Change your mindset so you’re able to accept some degree of risk in your investment portfolio. With the right diversity, you can shore up your portfolio with a degree of safety, even while you grow your wealth with appropriate risk. You don’t have to run out and start forex trading or get involved with commodities, but you can add a few more equities to your portfolio.
Stop and Think
Stop and think about your current investing mindset. Do you have biases and fears holding you back? If so, it’s time to make a concerted effort to change your mindset so you can invest more effectively.