Human beings’ natural instincts are not conducive to investing. Investing is about reason and logic. Yet too often emotion becomes involved, leading to market euphoria and stock market crashes. Below are some instances where you should do the opposite of your natural instincts.
Sell low buy high
Greed and fear are two powerful human emotions that move share prices. When the market is tearing upwards, our instinct is often to buy when everyone is buying. People hear stories of their friend’s stocks rocketing up and fear missing out. But too often this occurs when the market is near the top and future returns will be lower. Investors often overpay for stocks in this scenario as they are inexperienced and/or think the good times will keep going.
When the market is going down and the media is bombarding investors with negative news stories investors tend to panic and sell when sentiment is at its lowest. This is exactly the wrong time to sell as valuations are lowered with share prices reflecting the negative sentiment when future returns should be higher.
What you should be doing is the opposite – and look to sell when the market is high and buy when the market is low.
Being happy when the market is up
Investors are generally happy when the market is up and their stocks are going well. Long-term investors, however, should be happy when the market is down. Why is this so? As a long-term investor you will be adding to your portfolio and reinvesting dividends and hopefully not having to sell for a long time. If the market is down then the companies you like will be available for a better price. Buying shares for a better price and reinvesting dividends at a better price will give you more shares and therefore a higher return over time. Like any item you purchase you should be happy when it’s cheap and you can get more for your money.
Going with the crowd
Our herd instinct tells us there is safety in numbers which is helpful in many situations, just not with the share market. If you want to get good returns you need to do your own research and not do what everyone else is doing. Buy stocks that are out-of-favor. Popular stocks will have the price bid up and can often be over-valued.
Hot sectors with new technology attract competitors who will eat away at future profits. You want to look where no one else is looking. Look for boring stocks, out of favour companies in low growth industries. The less investors, brokers, media etcetera looking the better the chance of finding a mis-priced gem before everyone else cottons on and bids up the price.