A stock market is a funny place – both the seller and buyer of a stock think they are doing the right thing. However, only one can be right. In 2020 and 2021, we saw a spike in equity investors – the market was moving in one direction only. However, in the last 18 months, we have seen a lot of volatility in the market – the market is moving sideways.
Most investors are worried about their sinking portfolios. In such situations, the biggest challenge for investors is controlling their emotions. Even though we know the market will move north in the long run, our emotions affect investment decisions.
In times like these, another important thing is to go for stock portfolio management and asset allocation. Today, we will focus on understanding the psychology of stock investment.
Understanding emotions affecting investment decisions
If you are looking for an answer to the question – How can I invest in the share market, you need to understand the emotions that affect investment decisions. If you can master your emotions, your chances of becoming a successful investor will increase exponentially. However, it is one of the toughest things to achieve – even seasoned investors fail to do so.
Let us look at different emotions and how they affect your investment decisions:
- Optimism: You entered the market at 17,000 levels, and the market moved to 18,000 levels in the next six months. There is a feeling of optimism, and it influences your behavior and emotions. It makes you believe that the market will continue rising, and you invest everything you have, even at a higher valuation.
- Hope: The market moves to 18,200 and then comes down to 17,800, but you are hopeful that it will bounce back and you continue to invest in the market.
- Anxiety: It is a repulsive state of inner confusion, often accompanied by nervous behavior. Anxiety is not like fear, which observes an appropriate response to a perceived threat. It is a feeling of fear, worry, and uneasiness, usually generalized, and unfocused as an overreaction to a situation that is only subjectively seen as menacing. As per a study, emotional anxiety costs most investors 3% a year.
- Fear: When the market continuously falls, it brings confusion. It is the stage in which individuals doubt their investments and whether they will increase in value or not. It is called the fear of investors. In the above example, assume that the market continuously falls from 17,800 to 16,800 – you are fearful now. The stock that you bought at Rs 100 is now available at Rs 90, but you are unsure – whether to buy it now. Because of your fear of it falling further, you don’t make any fresh investments. Fear makes investors stay away from uncertain events prevailing in the market.
- Denial: It is a stage in which the investor watches the price of their stock drop. You may be reluctant to sell and recognize a loss. Selling a depreciated stock goes against an emotional tendency not to admit failure. In this stage, investors stared at a market that had corrected 20%, with no sign of going back to the earlier peak. However, stories about how things could improve prevailed as investors reassured one another.
- Panic: It is the worst human emotion that can actually hurt investors. Panic is an emotion that affects your decisions under conditions of risk and uncertainty – you may sell your positions even in losses and even leave the market.
- Relief: Investors often look for relief from market uncertainty by getting out. But being out of the market can create lost opportunities.
If you are going through negative emotions as the market is volatile, you must learn how to control your emotions. If you are unable, you may want to seek professional help. You can look for a top SEBI registered investment advisor and let them manage your portfolio. Alternatively, you can let the machine manage your portfolio. With an AI-driven platform like Jarvis, you can eliminate the emotions from your investment.