Lets explore further the part 2 of the above topic. If you missed the 1st part just go to the archives on the right hand side of your screen to access it. Enjoy the reading.
Some psychologists have suggested that there are four psychological elements to investing:
First of which is known as Anchoring, this is where investors assume that, in the absence of better information, current prices must be about right. The mindset is that, for example, in a bull market each new high is “anchored” to the last record and history becomes an irrelevance. Thus the laws of probability and long-term averages simply go out of the window in a blaze of irrational exuberance.
The second element is that of Prospect theory. This suggests people become much more distressed at the probability of a loss than they are made happy by an equivalent gain. People are therefore more inclined to taking more risks to avoid losses than to realise gains. Faced with sure gains they become risk averse, but faced with sure losses they become risk takers.
Market over- or under-reaction is the third element. It is where investors put too much emphasis on recent news at the expense of other data. That is the basic reason why share prices tend to rise too much on good news and fall too much on bad news (which we are very used to these days with the technological advancement), until the right level has been established.
The final of the four elements is the Regret theory, or the emotional reaction to having made an error of judgement. This may be due to a situation where a stock they have purchased has gone down or because they didn’t buy a stock they were looking at which has subsequently gone up.
Question is ‘How do you avoid these pitfalls?’
In answering the above question is also the question of ‘how can you tell whether a particular investment is right for you’? One of the surest ways is to have a sound investment strategy and also become familiar with the language used in the financial industry. You need not shy away from making your ‘Money work for you’.
Keeping your money safe by putting it under the bed or keeping it in the bank will not help either? It is very necessary to understand the risks involved in investing. In the words of Warren Buffet “Risk is a part of God's game, alike for men and nations”. Risk is synonymous to any business for that matter (with even banks failing all around us), set ground rules for successful investing. A number of ground rules in investing have been in use overtime and has stood the test of time. These rules are echoed time and time again by some of the shrewdest investors of our time.
With time, patience and effort you can become a successful investor in all the areas that present opportunities to you. Just have it in mind that there will be times you will lose money. I any case “You only have to do very few things right in your life so long as you don't do too many things wrong” – Warren Buffet.
Third and final part will follow shortly ................
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