Fight your fear of losing money with the help of these tips! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
We’re thrilled to share with you another investing insight in today’s “The Independent Investor.”
Every Wednesday, we publish articles about investing because we want to help you achieve true financial freedom through wealth creation.
Today, we’ll talk about a behavioral tendency that can negatively impact your investment strategy.
Continue reading below to know how you can fight your fear of losing money.
The Independent Investor
In today’s world, winning has become one of the measures of ultimate success. Individuals who want to get ahead in life push themselves to their limits, blurring the lines between passion and obsession.
This intense desire to win applies in the world of finance as well. In fact, in behavioral finance, winning and losing have been studied extensively.
According to psychologists Daniel Kahneman and Amos Tversky, potential gains and losses impact an individual’s decision making.
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Based on these psychologists’ “prospect theory,” potential losses inflict a greater emotional impact than possible gains.
For example: The emotional response to losing USD 1,000 is more severe than the joy that’s felt when gaining the same amount.
This phenomenon is called loss aversion, a related concept to prospect theory. Basically, this principle says human beings are wired to value perceived losses more than potential gains even when the amount of money at play is identical.
Simply said, it hurts more to lose than it feels good to win.
When Avoiding Losses is More Important than Gains
Since loss aversion is a concept that affects decision making, it’s no surprise that it impacts one’s investing strategies as well.
This behavioral tendency can even cause investors to behave irrationally and make poor investment decisions.
For instance: Instead of offloading a stock that performs poorly, an investor might hold onto it long after it should have been sold. The same also applies when winning stocks are sold too early. Moreover, loss aversion can lead to panic selling during an economic or market downturn.
The psychological phenomenon can make investors put more weight on bad news than good ones, causing them to miss out on opportunities due to their fear of things going sideways.
So, as an investor, how can you avoid the pitfalls of loss aversion?
Here are a few tips:
- Refrain from relying solely on mainstream financial media for information. Not every piece of news out there is written with your best interest in mind. In fact, some of those are written to mislead readers.
- Rebalance and diversify your portfolio periodically based on your investment goals and plans.
- Study the credit of the companies you’ve invested in or are planning to invest in. Digging deeper in this specific aspect of a firm’s operations will tell you whether to buy or sell stocks regardless of the economic situation.
- Pay close attention to the movements in the different sectors of the market. This will enable you to find new opportunities to take advantage of.
- Study the financial statements and performance of the firms you’ve invested in. Balance sheets are one of the signals you should look out for in assessing the stocks in your portfolio.
Make sure to keep these tips in mind so you can fight your fear of losing!
As we’ve discussed, human beings are wired to be afraid of losing. However, by acknowledging this common emotional response, you’ll be able to approach challenging situations more rationally.
With the right discipline and mindset, you can fight this irrational fear and protect your investment portfolio.
Happy mid-week, everyone!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Head of Marketing
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