The First Cut is the Cheapest
The First Cut is the Cheapest
Know your risk tolerance and manage your losses
Dr. Stanley Teitelbaum is a clinical psychologist and psychoanalyst who, for more than 35 years, has helped clients examine and overcome their emotional problems and interpersonal conflicts. He's appeared on Good Morning America, Nightline, 20/20 and Court TV and was a regular guest blogger on The Huffington Post. His latest book is "Smart Money: A Psychologist's Guide to Overcoming Self-defeating Patterns in Stock Market Investing".
Here's a link to the original blog post and episode.
We all have roadblocks that emanate from our personality issues, which can interfere with successful investing in the stock market. Buying high and selling low, the herding instinct, and searching for the next guru are among the prime examples of this phenomenon. Too many of us have internalized negative attitudes about ourselves as inadequate when it comes to managing our investments. Demystifying and overcoming these personal obstacles, along with acquiring and implementing several well-tested strategies can facilitate a greater degree of success. The goal is to transform our self-defeating investing patterns into more productive approaches. Knowledge is power, and by gaining greater recognition into their principles, investors can expect to generate more positive results.
WHAT IS YOUR RISK TOLERANCE?
People tend to exaggerate their risk tolerance and Dr Stanley suggests that individuals need to have an honest appraisal of how much they can afford to invest and lose. This is particularly important for new investors who may not have experience dealing with the highs and lows of the stock market. We've spoken elsewhere in the podcast about mathcing your risk to your experience in the market.
CUT YOUR LOSSES
Another crucial rule that Dr. Teitelbaum emphasizes is the importance of cutting one's losses. This means that investors need to focus on minimizing their losses rather than only considering the potential gains. He compares it to the real estate mantra of "location, location, location," stressing that in stock market investing, it's "cut your losses, cut your losses, cut your losses."
SELF DEFEATING PATTERNS
Dr. Stanley highlights four of the most common self-defeating patterns that investors tend to fall into. These include buying high and selling low, following the herd mentality, experiencing FOMO (fear of missing out), and searching for a guru who can provide all the answers. He notes that these patterns are often rooted in emotional roadblocks that individuals need to overcome to succeed in the stock market.
The emotions that influence investors' decisions are greed, fear, euphoria, despair, overconfidence and regret. These are the most common emotions that investors experience. Recognize these emotions and develop strategies to manage them effectively.
The four most common self-defeating patterns are: 1 buying high and selling low, 2 the herd effect, which means following the herd and following up what you think or see everybody else is doing and then going along with that and related to that. And related to that is what we call FOMO, the fear of missing out: if everyone else is buying something and it seems to be going up, then what a jerk I would be if I didn't do that also. So, I'm afraid, I have fear of missing out, I don't want to leave the party, I want to join the party. So that's FOMO. And the 3rd self-defeating pattern is looking for the guru and not recognizing the fallibility of many gurus. And the 4th self-defeating prominent factor is staying too long with an underperforming financial advisor.
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