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In my many, many years in investing from Bloomberg TV to Financial Times, to asset management, I have noticed many investors exhibit traits akin to gamblers, driven by a combination of Fear of Missing Out (FOMO) and the pursuit of quick dopamine hits associated with potential gains.
This behaviour, while widespread, underscores a deeper narrative about the psychological underpinnings that influence financial decisions in the stock market.
Investing in the stock market is often perceived as a direct route to wealth creation. Media portrayal of overnight millionaires and tales of stock market bonanzas play a significant role in fuelling these perceptions. However, such narratives can lead investors to develop unrealistic expectations about the nature of stock market gains.
The allure of immediate returns can cloud judgment, making investors prone to taking higher risks without adequate analysis or a long-term strategy.
FOMO is a powerful motivator in financial markets. It taps into the human fear of being left out of beneficial experiences that others are having. When investors see others reaping substantial profits from market movements, the fear of missing out kicks in.
This often leads to impulsive decisions, such as entering a booming market at peak valuations without recognising the risk of potential downturns. The desire to be part of the 'winning crowd' can overshadow the fundamental principles of investing, such as due diligence and risk management.
Dopamine, a neurotransmitter linked to the brain’s reward system, plays a crucial role in how investors react to the prospect of financial gain. The anticipation of a reward triggers dopamine release, which can be exhilarating but also addictive.
Patience is a virtue, especially in investing. Historical data suggests that long-term investing, characterised by patience and the power of compounding, often leads to more substantial and more stable returns.
However, the modern investor's impatience, fuelled by rapid technological advancements and real-time trading, can lead to frequent buying and selling, potentially eroding potential gains through fees and missed opportunities for growth.s
To counteract these tendencies, investors are encouraged to develop a disciplined investment strategy that acknowledges these psychological biases. Key strategies include:
Setting Clear Goals: Define what you are investing for and set realistic time horizons and expected returns.
Educational Empowerment: Understanding financial markets and investment principles can demystify investing and reduce impulsive decisions driven by market noise.
Diversification: Trade if you want to scratch that itch with a small money you’ve set aside for risk. It helps my investing that separately, with a different pot of money, I trade.
Alpesh B Patel OBE
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Disclaimer: The content provided on this blog is for informational purposes only and does not constitute financial advice. The opinions expressed here are the author's own and do not reflect the views of any associated companies. Investing in financial markets involves risk, including the potential loss of your invested capital. Past performance is not indicative of future results.
You should not invest money that you cannot afford to lose. Mentions of specific securities, investment strategies, or financial products do not constitute an endorsement or recommendation. The author may hold positions in the securities discussed, but these should not be viewed as personalised investment advice.
Readers are encouraged to conduct their own research and seek professional advice before acting on any information provided in this blog. The author is not responsible for any investment decisions made based on the content of this blog.
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