January 18, 2019

Don't look at your portfolio! From the problematic psyche of the investor

The human psyche is something fascinating. While the body and its functions are researched and explained in detail, the reasons why we do one thing and do not do another often lies in complete darkness. The explanations often point to prehistoric motives: survival in the savannah, the preservation of the species, the fear of the saber-toothed tiger.

The stock exchange, even if it seems very objective and matter-of-fact, is a highly psychological affair, also marked by age-old fears, or better: by the pleasant feeling of reward and the unpleasant feeling of pain.

When our stocks rise in value, our brain releases dopamine, a hormone of happiness, and that feels good. Probably because a financial gain in our savannah brain means we can feel safe until further notice. But when our stocks fall, we get scared and it feels bad - we fear hunger and misery.

That is why we often act irrationally. This also includes staying away from the stock market because it seems as unpredictable as roulette. But, it is merely a marketplace for buying and selling shares in companies, with much higher returns than other investment models. Above all, if one invests themselves. And on a long-term basis. And one stays cool.

It means you have to outsmart your prehistoric brain. With the stock market, wins and losses are close, sometimes there are only seconds in between. Practically every day the portfolio can give you a feeling of happiness or pain. Depending on the price trend.

This leads - in addition to anxiety - to act unwisely: Firstly, to buy securities that are constantly increasing in value and are therefore not only overpriced, but will soon also lose value, and secondly, to sell securities whose value is falling - instead of buying more of them when they are cheaper. As a result, you do exactly what you wanted to avoid: pure gambling. Read more about it:

Retirement advice | Warren Buffett`s view

The solution is to ignore your portfolio. Uninstall the trading apps from your phone. Or at least disable the notifications. Check stock prices only when you want to buy something, and then rejoice when something is cheap - even if you already own it. Meditate. This gives you more lasting feelings of happiness than a momentary rise in price.

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