What’s Your Investment Psychology
This market environment is testing everyones psyche. The obvious support, head & shoulders pattern, anticipation of growth and the media are all building the perfect storm to suck the investor into believing in the downside. I am not saying it isn’t justified, I am just stating it never gets old for me to watch the psychology of the markets at work. Let me try to put this in perspective.
Longer term (12-18 months) it is logical to assume the economy will be in a recovery/growth mode. Expectations are realistic at 1-3% GDP growth and the market growth of 12-20% over that period would be realistic as well. Thus, logic would dictate we determine where the growth will come from based on our analysis of the current situation and how money flow will be distributed during this period of growth. Put or porfolio in alignment with the analysis and set sail for the destination which will take 12-18 months. We would monitor our course and make the necessary adjustments along the way to stay on course and account for the changes in weather.
Short term (daily) the raging neurtoics of trading will give us a different view of what is happening and how it will impact the future (next week). They will generate good scenarios one week and bad ones the next. Depending on how many believers we garner to follow the prophecy will depend on the impact on the markets for that short period of time. Thus, short term trading is based more on human psychology than logic. The great thing about human beings is their ability to reason. Many believe this what seperates men and women from animals. Regardless, this reasoning is what changes market direction almost at the drop of a hat. Thus, short term if we trade, we have to pay more attention to sentiment and human reaction (psychology) than logic.
Neither of the scenarios above is right or wrong. They are just observations and methods of approaching the market for investing/trading. You and I have to decide which one is right for us and implement it to the best of our ability learning each step of the way how to be better at investing.
This brings me to my long winded point, the market is at a decision point. Hold support and remain in the trading range near term or break support and start a new short term trend. It is not going to be resolved today. That is the good news. The bad news it is going to take some patience to let this play out. Therefore, if you are a longer term investors (above 12-18 months) a break of support is an opportunity to add to your positions as you focus on the horizon of your longer term growth plan. If however, you are a short term investor, you are already short or salivating over the prospect of being short on the break of support. Either way both are happy. The challenge is waiting patiently for the opportunity to develop versus projecting our profound wisdom on our portfolio and forcing positions versus exercising discipline.
I know it’s difficult to be a logical and disciplined investor. I have been attempting it for the last 30 years. Sometimes it works better than others, but let this scenario play out short term. Be disciplined in how you approach this potential swing point in the markets and don’t be in a hurry to think you know what is going to happen. Stay focused and most of all stay disciplined and use your stops.
Have a good day of investing!
