Do you remember the last time you fell in love with someone you like? What were the emotions you experienced? You would probably feel excited but at the same time tensed. You may even feel happy but at the same time think how can this be real? Some people say relationships are only exciting during the so called honeymoon period and becomes less exciting and more comfortable after some time. So how do all these relates to our journey investing in the stock market?
The stock market is full of emotions. It is more complicated than a love relationship between 2 person and even more complicated than a love triangle situation. The stock market is made up of emotions of hundreds of thousands and even millions of people. How does it look like in a chart?
Credits: myenticingjourney.wordpress.com
There are so much emotions as you can see from the chart above. Its like an emotional roller coaster ride. Every investor will go through the stages of excitement, thrill, fear, panic, hope and optimism. Let's take a look at the stages a new investor would probably go through:
Most new investors who want to start investing would start with excitement. Its like they really fall in love with the stock market. Out of the people I met so far, I've never seen anyone who starts investing without feeling excited. However, when there is excitement, most would forget that they need to be logical as well. This happens in a love relationship as well. It seems like when we fall in love, we forget all about our brains.
This is the so called honeymoon period in a relationship. The thrill to meet one another everyday. The thrill to talk to one another everyday. This emotion is much more exciting than the excitement phase. For investing, new investors get the thrill when they make some money from the stocks they buy. The stocks start to go up and they see their portfolio increase from $100 profit to $1000 profit to $10,000 profit. This is the thrill which is very real.
Credit: http://commons.wikimedia.org/wiki/File:Scared_Child_at_Nighttime.jpg
Thrill and excitement dies off after awhile for most of the events in our lives. The dream job which you thought would last you for the next 10 years becomes boring after just 1 year. The excitement and thrill of owning that new gadget dies off after awhile. The thrill of a new relationship becomes more comfortable and mundane after sometime when you realise that your partner may not be that perfect. This is the real test for us. For investing, the stocks you bought is losing money. It does not seem as perfect as what you imagined it to be. Now you might be thinking, should I sell or should I average down and buy more? It is very hard to make a decision when you have fear.
After fear comes panic where we make rash decisions. For love relationships, we may end up quarrelling and breaking up. There are lots of hurts involved when we make panic decisions. For investing, we lose so much money that we just sell the stocks away, not thinking whether is it the right thing to do?
In relationships, you'll realise that there are no perfect people out there. In investing, you'll realise that there are no guaranteed money making stocks out there. This is the stage where we really need to calm ourselves down and think carefully on why we started the relationship or invested in that stock in the first place? The partner you chose to be with may not be that perfect now but he or she is probably the same person whom you first knew. The stocks which you bought may be going down a lot in price but it may still be the same company which you know is strong. The fundamentals may still be good.
If you calm yourself down now and make the right decisions, you may realise that the partner you have is still good and you can invest more time and fall in love all over again. If you think that the stocks you bought seems to be still fundamentally stable, you can invest more and average down the price.
On the other hand, if you've thought about it carefully and think that the situation is different from the first time you encountered, then you should cut loss and move on. This applies for both relationships and investing in the stock market.
5. Hope and Optimism
If you've made the right decisions in point 4 above, then hope and optimism comes into your life. Your relationship with your partner becomes stronger now as you put in more effort for it. The investments you average down is going back up and you start seeing profits.
There are also times when we have to cut loss for our investments. If we know we invested for the wrong reasons in the first place or we are not sure why we invested in that particular stock, cutting loss will let us have a new beginning with clearer direction for our portfolio.
For relationships, sometimes a break up may be inevitable if both are really not compatible. In this case, its better to move on where there will always be hope for a better future.
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