The Secret To Becoming A Successful Investor
Many investors believe there is a secret to becoming a successful trader and investor. Some investors will spend years of their life searching for that elusive indicator which will guarantee financial success and strong investment returns.
Here's the shocking news - there is no such indicator.
Becoming a successful investor is a long process with a steep learning curve. While there are many aspects to learn, both fundamental and technical analysis, one of the most overlooked and yet crucial categories for the investor to focus on is the psychological aspect.
You might have discovered a great fundamental or technical indicator, but for many people their downfall and reduced investment returns in their portfolio stems from their own mental mistakes.
Most investors and professional traders do not realize the importance of how the psychological aspect can negatively influence the investment returns of the portfolio.
One of the most common mistakes that harm investment returns is the to basic emotion that drives all investment decisions - fear and greed.
This is certainly not a new or unique characteristic that affects investment returns. Many books have been written about the need for investors to realize that their emotional drive stemming from fear and greed will be one of the most important determinants in their investment returns.
Why do people chase stocks? Because they're afraid they might miss the boat. Why do investors continually buy a stock as it goes down? They're afraid of losing money and not being honest in their assessment that the investment was a poor decision and they can't close the position.
Almost every trading decision has some psychological aspect built into it. Cutting profits short and letting losers run is the worst and most common mistakes that hurts investment returns, even among professionals.
When a trade shows an investor a profit, many people want to lock in gains before they lose it. This is a common reaction, however a very poor long-term decision that definitely lowers long-term investment returns.
This fear of losing this small profit usually ends up in reduced overall investment returns, as the trade usually continues being profitable, far longer than one would think.
Conversely, most investors do not cut their losses to a small level, but continually add to a losing trade. Investors need to reverse this psychology and become fearful when a position starts to become a loser.
Investors need to worry that a small losing position will become a large losing position. Conversely, investors need to be greedy when a small profitable position occurs, adding to winners and looking for an even larger gain.
Over the long term, for strong investment returns to occur, a portfolio needs larger winning positions and smaller losing positions. One needs to try and eliminate as much psychological impairments as possible that will prevent an investor from becoming financially successful.
Clearly this is only a brief overview, but each investor needs to understand their psychological faults, mistakes and areas for improvement. Only through serious psychological self-evaluation can a trader and investor improve the performance and returns of their portfolio.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.