MarketPsych: How to Manage Fear and Build Your Investor Identity

Chapter 6. Your Investor Blind Spots: Identifying (and Avoiding) Mental Traps

Most investors who fail to reach their goals do so because they fall into identifiable and often predictable mental pitfalls along the way. If there were signs that said "Warning: Mental Pitfall Ahead!" there would be no problem. But such traps catch us off-guard precisely because they lurk in our blind spots. They already exist in our psyches, and they do their damage before we are aware of their presence.

Every investor has weaknesses and vulnerabilities. These make up the darker side of our investor identity. And though some are more at risk than others, these investor traps are universal human tendencies to which every investor is susceptible.

Forging a more effective investor identity involves not only recognizing these traps, but also realizing your personal susceptibilities to them and developing the ability to sidestep them along the way to your goals.

This chapter describes the most common and insidious investor traps. You will learn to identify and minimize the impact of these common mental mistakes.

Trap #1: Win/Lose Mentality

Most investors love to keep score, and there is no bigger, clearer scoreboard than that provided by stock markets. Our personal score cards are delivered in the form of monthly statements, but we no longer need to wait a week to get the final numbers. With Internet access, we can see how we're doing at any given moment of any given day. A gain on the day is translated as a ...