Improving Investing Psychology: 3 Steps to Overcoming Biases and Emotions

Steps to growing the heart & mind of an investor 

• The most important factor in investing is not knowledge, experience, resources, education or connections, but investing psychology.
• To outgrow your peer investors, improve your investing psychology by following 3 simple steps: Recognise habits, develop a trading plan and keep a record of your trades.
• It’s important to always base your investment decisions on facts and all available information and not just your gut feeling or instinct.

Investing can be frustrating, can’t it? You can read a hundred articles and a dozen books on investing; for some reason, your investment returns still refuse to improve. To make matters worse, sometimes an ordinary Joe with no background in finance will come along and outperform you! In fact, they may, for a while, even outperform experts in the field. Why might that be?

Well, unlike other fields of expertise, you can argue that education, experience, resources and connections, while still vitally important, come secondary. The most important factor in investing is psychology and behaviour, which is why the topic of behavioural finance even exists! You can have all the knowledge in the world, but if you’re not aware of and in control of your investing psychology, you will be prone to biases, emotional decisions or irrational assumptions.  

3 Steps to Improve Investing Psychology

Step 1: Recognise Your Habits

An important aspect of developing successful investing psychology is to be aware of your investing habits right off the bat. Be honest with yourself regarding reflecting on your past successes and failures. Keep an investing journal, but not just to log prices in and out. Why did you make this decision? Why did you regret this other decision? Did you feel stressed when investing? These are some questions you should ask yourself when you’re determining how emotions affect your investment decisions.

Step 2: Develop a Trading Plan

Once you have identified the emotions impacting your decision-making process and under what circumstances they occur, then you are ready to come up with a detailed plan for yourself to follow should the situation ever occur. Sticking to these rules is paramount. They make sure that you make choices using logical thinking during highly emotional situations and not an emotionally clouded mind. 

Step 3: Keep a Record of Your Trades

For further analysis and development of your investing psychology, keeping track of the transactions you make in financial markets is good. This makes it easier for you to review your trading habits in the future. As mentioned above, it's as important to log what you were thinking and feeling at the time as it is to note down the number of shares you got, when you got them and at what price! 

INVESTING PSYCHOLOGY. COMPLETED. ✅

Sources:

1. https://www.investopedia.com/terms/b/behavioralfinance.asp 
2. https://www.collaborativefund.com/blog/the-psychology-of-money/ 
3. https://www.investopedia.com/articles/trading/02/110502.asp 
4. https://www.ig.com/sg/trading-strategies/the-importance-of-psychology-in-trading-190315 
5. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/trading-psychology/ 
6. https://www.investopedia.com/articles/stocks/10/5-steps-of-a-bubble.asp 
7. https://www.investopedia.com/terms/e/endowment-effect.asp 
8.  https://www.sciencedirect.com/science/article/pii/S0306460315300721