This article will examine the proper investing mindset, plus the more commonly found investing mindset that people actually have.

Whilst focusing on psychology, this article is predominantly written to understand why people make mistakes and how to avoid these. The assumed setting is a private individual, which does not exclude corporate parties as employees are human after all. In this article we will look at reducing the negative influence of emotions.

Investing mindset ideal

The ideal mindset could be described as attempting to emulate that of a machine, meaning free of emotional thoughts. Though this goal is not reachable; all humans have both reason and emotion, some control one better than the other, but none can fully control both. Creating a support system for your emotional weak spots is something everyone needs; for which we have the next two paragraphs.

For a rational focused thinker, price drops are either considered a buying opportunity, or a sale based on risk. To understand the difference, see what caused the drop in value; if there is news about that specific asset, it is risk based and you might want to avoid buying, as the company is facing trouble. If it is more of a general market reaction (change in interest rates for example), this could be a buying opportunity as rates rise and fall, but inflation is here to stay (note that most long term asset classes rise over decades to at least keep up with inflation).

The goal of investing is to make a profit; doing your homework and watching the market is a good way to get started, both activities that should stay on your to-do list. Subscribing to industry vital sources is a must! This is particularly advised as doing all that work separates your investment from amateurs buying on a whim or based of other`s work. It means that you are almost professionally active as an investor.

Investing mindset pitfalls

• The biggest mistake anyone can make is panicking about a value drop, without even looking at what is causing it. This can lead to selling with a loss and absolutely no plan what to do next: You end up with a pile of cash and bitter disappointment, lasting several days if not longer. This is a classic case of herd mentality; you sell for no other reason than the sell orders of others.
• FOMO: Buying when markets have been rising for days on the assumption that you can sell at a quick profit. Rising markets tend to get corrected as those who bought earlier (creating the rising market), sell their assets for a quick buck. Besides Fear Of Missing Out, this is also referred to as band wagon effect; buying shares because others have been buying them.
• Selling investments to buy needless trinkets; we realise this seems dumb, but it really does happen. We even wrote article 47 Shopping psychology; why we spend about such spending.
• People tend to view things from a positive point; assuming that negative scenarios will get fixed quickly or that gains from the past are easily repeated. This may lead to overconfidence as market will always rise and fall. If a piece of bad news is seen as a buying opportunity, but instead of getting resolved compounds, that will result in (short term) losses, creating a possible cash shortage, after which you could be forced to sell at a loss.

Ways to improve your mindset

The absolute first thing is figuring out what you are good at, when it comes to understanding underlying price movements. These are very different for different asset classes: What is relevant for big, rich world only, corporate equity is not always relevant for the value of third world debt.

If you see a cheap asset and have some money to spare; think of how fast you need that money back plus how to cope with not getting your investment (including dreamed up profits) back within the desired timeframe. By having a plan for when you success is partial or lacking, you might avoid panicking. Having a tight budget is not per definition your friend here, as we are not sticking to a pre defined plan. What helps is having a clearly separated cash account for fixed expenses, so your other bank accounts could potentially be used to buy when the opportune moment appears.

A different method, although partially based on emotion, is to invest in the company whose products you use. This doesn`t reduce the amount of money you spent on their product, but does give you a bit of insight in how they are doing. Plus it somewhat avoids others capitalising on your spending.

Invest based on where you are in life, and no more than can be missed for a long time. This means that a plan needs to be made, plus research on how to get there. Followed by even more research on what investments best suit the created plan, this final plan needs to be updated as required, with check-ins every month to see how things are going. A possible method of achieving this is via automated investments, or by treating it as a retirement account (assets must be long term virtually guaranteed viable, such as precious metals or big funds).