Successful investing: how to stay on track

Are you reluctant to invest excess liquidity even though it’s just sitting on your account and not earning you anything? You are not alone.

Rationally, you may be aware that investing this money could bring long-term financial gain. Often, however, we lack the motivation to invest our money in the future rather than spend it now – especially when we are still young.

And when we finally decide to invest, even very minor market fluctuations can be unsettling. Such situations lead to ill-considered actions – such as the hasty sale of an investment.

In many cases, these behaviors are due to unconscious internal processes such as the self-control effect, hindsight bias or herd mentality.

We make new resolutions at the start of every year, only to abandon them soon after. Sound familiar? Whether it’s to work less, eat healthier or even budget better – we often find it difficult to follow through on long-term intentions. This is especially true when it comes to money.

For those just starting out in their first jobs, other investments often take priority. For example, they are more likely to buy furniture for their first apartment, or a car, than to buy shares or start saving for their retirement.

Why do we do this? Behavioral psychology has identified one reason for this: according to the self-control bias, people tend to spend more money today than they do investing for the future. This is because we often lack the imagination to think about future events or simply the necessary discipline.

Financially, however, it would probably be worthwhile considering a more long-term perspective. Do you dream of owning your own home or starting your own business? Investing early and wisely could make your dreams come true much sooner than a vague New Year’s resolution.

Imagine you’re on vacation and looking for a restaurant for dinner. There are a lot of people waiting in front of one restaurant, but only a few in front of the one next door. Which restaurant would you rather go to? Probably the first. “If so many people are waiting in line, the food must be excellent,” one might assume. Like most people, in this case you are subject to herd behavior, something which also happens in the financial sector.
Investors sometimes tend to underestimate market developments and fluctuations. There are no perfect predictions and new market situations can rarely be easily understood, let alone predicted.
People are subconsciously influenced or guided by others in their own environment, and also by those who are, in their view, professional role models. It gives them a sense of security, which can sometimes be false. This phenomenon partly explains why investors often buy stocks when prices rise and sell them again as soon as they start falling.

But beware: group-oriented behavior can be dangerous. Imagine you are in a small boat with five other people. If everyone suddenly moved to one side, the boat could capsize. Something similar can be observed on the financial markets. Asset bubbles arise when investors panic buy stocks or bonds in bulk. The market can even collapse completely like it did in 2001 when the dot-com bubble burst and countless private investors experienced severe financial losses.

In order not to succumb to herd instinct, it can be helpful to evaluate your own risk profile. Investment strategies are suitable for an investor if they can sit out market fluctuations and not suffer financial hardship in the event of losses.

Herd behavior does not only happen in times of uncertainty. Trends or recommendations from public opinion leaders can mobilize people en masse.

Anyone who finds themselves in an uncomfortable investment situation in future should first focus on their own long-term strategy and then define a set of well-considered measures as necessary. The famous quote by the US major investor and author Warren Buffet goes even further:

“I knew it!” or “It was obvious that would happen.” When it comes to investments, it would be extremely lucrative to know how the market will develop in the future. Of course it is impossible to know in advance whether an investment decision is the right one. Nevertheless, people tend to claim in retrospect that they knew how a situation would turn out. Investors often fall prey to this phenomenon, known as hindsight bias.

Our memory adjusts our predictions to what we know now. As a result, people can no longer remember what they predicted in the first place. In retrospect, the outcome seems indisputable, almost as if things could not have turned out otherwise.

It is obvious that we are subconsciously influenced by behavioral tendencies when investing. It is worth reviewing your own investment strategy regularly and recording important decisions in writing. Even if most investors choose a different path, this does not mean it is necessarily the right one for you.

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