27 March 2011

Your emotion controls how many returns you can get

Over the period of investing, common mistakes which I think the investor made can be categorized into few:

1. Data Analysis

2. Emotion

Data analysis can be also sub-categorized to Fundamental / Technical perspective or even Macroeconomic perspective. You can learn from many ways to improve your analytic skills before you made a very good investment. However, emotion plays a bigger part to determine how many returns you can get.

There are various theories which teach investors to buy at a lower point and sell at the higher point. However, due to the greed and fear factor, investors require a very strong self discipline to follow the framework they have set and not to 'Buy High' and 'Sell Low' due to market crash.

There are few players which I conclude as
Institutional Investors, Retail Investors & Speculators in this market. When market crash, we will see a huge outflow from the market due to the panic sell. Even fund managers or institutional investors are also forced to liquidate their portions in the markets due to redemption made by the retail investors and caused that their performance will follow the benchmark. Speculators will start "Short"ing the market and tried to earn a huge profits from there and make the situations become worse. 

How to control your emotions depends on how your investment strategy/asset allocation works. Most people will reserve an emergency funds for the panic sells purchase. There are also short term investors who just trade during the boom markets and tries to earn a quick profit. There are also long term investors who are fully invested in the market regardless how the market moves upwards or heading south. If you have an asset allocation and portfolio rebalancing plan, you must exercise your plan regardless how your emotion tried to control you to do the other way round.

People who are afraid to see unrealized losses are the one who are also afraid to see unrealized gain. Their mentality is still "Investing = Gambling". If you have this mindset, you will just run away when you earn a bit profit but will quickly cut lose if you see your purchase price is lower than market price.

So, try to control your emotion and learn from the mistake you made earlier. Find a proper asset allocation plan as well as develop your stocks picking skills so that you can avoid to be controlled by your emotion.

Good Luck!

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