6 Ways to Increase Your Probability of Success in the Markets & Overcome Market Psychology

Market psychology can be defined as the reaction to investing. It refers to the emotions, beliefs, and attitudes of investors which influence their decision-making when it comes to buying or selling financial assets. Over time, investment Markets are generally driven by logical and mathematical factors. As such, learning to combat our human emotions is not easy. However, learning how the markets work can reduce the number of surprises and dramatically increase your probability of financial success. Assets rise and fall in value, the more extreme the swing, the stronger the emotional sentiment.

For a path toward a successful financial life, work with a fiduciary financial professional for sound advice and guidelines, all with your best interest in mind. Participation in the markets has its emotional ups and downs, but when you compare non-participation to participation with the right guidance and mindset, historically the long-term returns have been much higher and your probability of a comfortable financial life improves.

1. Equalizing the Costs

The cost of investing includes monetary and non-monetary expenses. Monetary can be comprised of items like management and brokerage fees. Non-monetary is softer; the time spent learning about the markets, emotional investment (loss of sleep at night) and things like keeping up with legal, tax laws, and new investment products.

Today’s modern world full of Artificial Intelligence, social media, algorithms and more require emotional intelligence and a great deal of time to understand. Working with an experienced market professional can allow you to outsource this work and leave time for you to focus on your passions in life. In 2023, it’s not enough to guess or even estimate – educated planning and strategy is necessary.

2. Long-Term and Short-Term

Investment markets reflect the larger economy. Economies around the world experience both times of expansion and contraction. In our world, we have typically seen expansion about 75% of the time, leaving the other 25% of the time in contraction. Our emotions share a similar reaction between excitement and depression. Surges of pleasure with favorable uptrends and neurotic negatives with declines. 

Generally, assets are positioned in the markets most appropriate for the time frame in which the capital is needed. Long-term assets often focus on growth, higher returns and have more volatility. Assets needed in the short term generally focus on stability and have both lower volatility and returns. Positioning assets in investment markets following this simple rule can greatly reduce your emotional investment and increase returns over your lifetime. 

3. Market Awareness

Start by figuring out your emotional comfort level as well as the rate of return your assets need to earn for you to reach your financial objectives. Then determine which market sectors will provide the rates of return you are seeking and invest. As time passes and your life evolves, continue to review your financial needs, and reposition assets to meet those needs as economic cycles occur. This process takes an honest assessment of your knowledge, means, and objectives. For this reason, working with an experienced professional provides a huge benefit – they are going to help ease the emotional and financial ups and downs and be able to insert logic when it is needed.

There are two noted market trends – bear and bull. They are both related to volume shifts. Bear markets have prices falling and are accompanied by emotions of fear and the urge to sell. Bull markets feel optimistic and emotionally investors are confident; prices go up, but irrational decisions can negatively impact returns.

4. Manage and Control

Unfortunately, a disconnect between logical strategy and emotions can be drivers for selling early (short-term) diminishing the significant gains (long-term). As we go through various phases in life so do the markets. On the average upswing, markets have a lifespan of five years. It doesn't mean earnings stop entirely – but they could settle in with a slower and more steady growth. In contrast, the average recession lasts about 17 months.

Whether in a Bear or Bull market, diversification and logic are necessary for healthy investment returns. When developing strategy, don’t underestimate the value of thinking about all your assets; your entire portfolio and how each of the underlying accounts and investments work together. The probability of hitting the ‘home run’ is low. Just one investment increasing in value generally won’t produce a financially comfortable life.

5. Move Forward

Focus on the future. It's coming with or without your approval – better to be proactive, have a plan and manage the calls so you can reap the benefits. Start by building a blueprint and build trustworthy confidence to reduce the risk and the stress, allowing the market to respond back to you - positively.

Questions to ask yourself: When do you need the money you are investing? This will help you determine if you are in the right markets. Does your plan have a solid strategy built into it? If you have some concern, do yourself a favor and look for help.

6. Change Perspectives

Most individuals take shortcuts and as such don’t always experience success. Our human minds begin to associate financial markets with negative emotions. Acknowledge the market is not just about winning and losing – it’s about strategy and duration.

The market will continue to do three things: it goes up, it goes down, or it stays the same. Talking with a market professional helps to take advantage of the market's pluses while helping to avoid the negatives. Working with one could change your perspectives and broaden the future's outlook. If you would like to talk with one of our Lead Advisors, contact us today.

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.