When you manage your investment, you need to be aware that your very own behavior may be guided by emotions rather than rational thinking (we’ve already said something about this: see “How to lose money in the stock market“). In fact, there is a whole discipline that studies financial markets from this point of view, called behaviorial finance.
Behaviorial finance is a very approach to look at markets, but it can also teach you a few things about yourself, that you should keep in mind when you invest your own money.
- Learn to know yourself, and your irrationality — you behave, at least in part, irrationaly: your investments should keep that in account.
- Be aware of investment’s risk — underestimation of risk is the path to a unsuccesful investment.
- Do not ascribe a successful bullish-investment to your own skill — there’s no need of much skills to find a profitable stock in a bull market. If you ovverrate yourself, you end up taking excessive risks (see point 2).
- Don’t fool yourself thinking you can control purely random events — there are some things that are random, and you can’t control. If you got luck one time, don’t pretend that it was because of your cleverness.