Behavioral Investing: Use the Force of Mind Tricks
1. "Size Matters Not"
As Yoda demonstrates, size does not necessarily signify strength or might—and the same is true with stock investing. A relatively small, modest-seeming stock might be the next breakout star of the S&P 500, while a large, steady stock could wind up as the next General Electric Co. or Enron. The important thing for stocks of all sizes, large and small, is to ensure that the fundamentals are present—a solid price-to-earnings ratio, extensive information on past audits, and data on plans.
2. "There is Another" Hope
One of the most classic lines in The Empire Strikes Back occurs when Obi-Wan fears that Luke "was our last hope,"—but Yoda reassures Obi-Wan that "there is another."
The same might apply to market rallies and tops. No matter how dark it may seem while in the depths of a recession or depression, the next market rally may eventually show up. By staying invested, avoiding any attempts at market timing, and paying attention, investors could work to keep the course and avoid selling (or buying) in a panic.
3. "I’ve Got a Bad Feeling About This”
Investing in the stock market is a journey of ups and downs, and it takes time and practice to know when to ride out a dip vs. when to pull out. Every stock or security should have an individualized escape hatch. Put another way, how long would you want to hang on to a failing investment? When the value drops by 50%? Or 75%? When deciding whether valuation decreases are short-term blips or signs of a longer-lasting down market, what might you consider?
There is no one-size-fits-all answer to these questions. Still, it is important to think about and commit to your responses—whether this means pulling the plug on investments after three months of unprofitability or holding onto them for long-term results.
4. Sometimes, "It's Not My Fault"
Although Han Solo often tried to get out of a sticky situation too quickly, his complaint holds some value. Even seasoned investors can make mistakes, and even more frustrating are the moments when the supposedly "valid" decisions do not always pan out. If you stuck to your plan and still lost out on some cash, do not spend much time beating yourself up. Instead, pick yourself up, remind yourself that these things happen to everyone, and try to move forward with any lessons you learn along the way.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. All indexes are unmanaged and cannot be invested into directly.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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Footnotes
1 Star Wars Day – May 4, 2023
https://nationaltoday.com/star-wars-day/
