Stock Market Psychology – Prevail in volatile markets

When markets seem to fluctuate aimlessly but violently, investor‘s nerves are often shattered. Fear of losses is psychologically challenging to control and causes hectic and wrong decisions, especially among private investors. A few “tricks” can help.

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The fight for psychological marks resembles a gruelling war of positions. On the stock market, positive and negative impulses seem to alternate in a continuous loop, sometimes one side gains the upper hand, sometimes the other. And again and again, there are daily losses, which drive the welding beads to the forehead of many a feeder. The fear of the “next crash” all too often makes the “amateurs” on the stock market pull the ripcord. But if you turn your back on the market, you miss out on the return opportunities of the future – and they are guaranteed to be there.

Fluctuations delivered

Investor legend Charlie Munger, partner and alter ego of Warren Buffett, once said that as a successful investor you have to be a kind of “mutant” capable of buying and selling when the market seems to suggest the opposite. However, even professionals are often at the mercy of the erratic fluctuations on the market, which we are currently observing in a continuous loop.

Private investors often fall into classic “traps” as well. This includes the hectic buying and selling in sideways phases, which seem to lead to a new upward trend and then again a downward trend. Usually, there are smaller, but painful losses here, which lap over time – also because of transaction costs and spreads in a trading pull at the profits. “Back and forth emptying your pockets” is not an old stock market saying for nothing.

First, check the investment horizon

The mental “set-up” is crucial if you want to survive in unclear stock market situations. First of all, there is the self-assurance of one’s own goals and targets when investing in equities. What about my investment horizon? Those who have invested for the long term, i.e. in periods of five to 20 years, need hardly worry about fluctuations in the range of several thousand points. The yield triangle of the Deutsches Aktieninstitut (DAI) can serve as a support for this insight: With long-term equity investments, a loss is improbable. And on the other hand, there are average annual returns of around six per cent.

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Risk is part of the stock market – as is yield

In addition to the investment horizon, risk appetite is the second crucial psychological cornerstone in stormy stock market times. If you want to remain committed for the long term, you can even absorb losses of 30, 40 or 50 per cent, as has been the case historically on the stock market. The tech bubble and the consequences at the turn of the millennium as well as the mortgage and financial crisis have severely strained the nerves of millions of equity investors around the globe.

If you want to navigate your portfolio through the jerky stock market landscape actively and don’t want to sit back and wait, you can, of course, do so. A few psychological tricks, but also concrete rules on “Depot management in swing exchanges” can help.

Cost Average Effect

If the right approach is taken, declining courses can lose their horror – also from a psychological point of view. Those who put the same amount into the stock market piece by piece buy more shares or fund units in periods of weakness than in boom phases. This cost-average effect “smoothes” the entry price over a more extended period. And it provides for a certain relaxation with the investment of funds.

Establish a balance

The professionals call it “rebalancing” when, at a certain point in time, the distribution in the portfolio is adjusted back to the initial level. Private investors can also do this and thus continue to pursue their investment goals. Those who, for example, want to bet 50 per cent on shares and 50 per cent on bonds would, after a good equity year, buy more of their bonds or realize a portion of their equity gains to restore the initial level.

Dividend Strategy

Instead of realising profits from time to time, investors can use a tried and tested mechanism: The distribution of funds or the dividend on equities in a custody account effectively protects you from attaching too much importance to short-term price movements. But perhaps you should be worried if the amounts that flow into the cash register become smaller because a company may be less profitable.

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Stop Loss

Anyone who has set up losses via a corresponding order for fund units or shares in a custody account protects themselves quite effectively against excessively heavy losses on the stock market. The extent of these potential losses should be determined following a review of the company’s risk tolerance. If your own papers are running in the right direction for a longer period of time, this level should be “re-adjusted” for the automatic exit. Some brokers also offer trailing stop loss orders, which automatically adjust the distance to the current price level.

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