Category: Money Tips
Created on Sunday, 11 July 2010 05:24
Written by Samuel Goh Nai De
People often develop a negative perception towards words like “Greed” and “Fear”; conversely, could these words be viewed in a positive way?
In the context of life and human behavioural, greed and fear are often regard as human flaws and weaknesses that must be eliminated for the better good. These are emotions that bring unhappiness and dissatisfaction to our lives.
However, such a perspective has became subjective and controversial as people are now beginning to understand a broader view of the human emotions. Whenever greed and fear inevitably set in, one would be concerned with the subsequent possible actions.
For instance, when people become greedy, they may be driven to earn more money. We may associate this act with words like “motivated”, “ambitious” and “driven”. One will tend not to regard it as immoral and negative.
Yet, in another instance, the same cannot be said if greed gets the better of an individual: He/she may attempt to engage in criminal acts (rob, cheat and steal) to achieve his objectives; such acts are immoral.
I, however, believe that greed and fear are parts of human psyche. In the investment arena, both Greed and Fear are neither moral nor immoral, these are A-moral.
What do I say so?
Greed and Fear are "learned-responses" which are cultivated differently in each individual. A bad or good experience in trade may become a "learned-response". This would be carried forward to the subsequent tradings, which will then be blinded by emotions rather than the trading plan and adopted strategy.
As the saying goes, “High Emotions equals to Low EQ & IQ”. Therefore, we should stay objective at all times and acknowledge the fact that overwhelming emotions will affect our investment decisions and performances. The Human Emotional Cycle
For example, you have been observing a particular stock before you finally decide to pull the trigger and buy it at an attractive price. As expected, it is heading favorably in your desired direction.
Gradually, greed kicks in and somehow, you have a feeling that the stock price will continue to shoot up even higher. Hence, you decide to increase your exposure in this stock. Indeed, the stock price continues to head north. Eventually, it goes past your personal target price. Now, the million dollar question will be as follows: Will you sell the stock?
In a typical situation, due to greed, many investors will continue to hold on to the stock with the hope that the stock price will continue to hit even higher grounds. However, as seen from the above chart, the reality is that many of them will fail to recognize that the stock market is already at its maximum financial risk at this point of time. How do we embrace greed and fear?
Since greed and fear are part of the normal human psyche, it is logical to manage these emotions appropriately. At this point of time, the crucial question will be: “How can we manage greed and fear effectively?” Typically, bad investment decisions are usually made when emotions get the better of us. As a result, losses are frequently incurred.
The first step is to be clearly aware of your emotions. Ask yourself a series of questions. For instance, is the investment decision to purchase a particular stock made simply due to greed? You will then be able to assess and make sound investment decisions objectively along with the awareness of market sentiments.
Also, you may tend to be subjective and be influenced by your emotions in making investment decisions as most of your investment capital is your ‘hard-earned money’. As a result, you may take greater ownership and deal with any possibility of losses incurred in a negative and adverse manner. So, the second step is to outsource part of your investment funds to an external financial and investment professional/advisor. A financial advisor is a professional who renders investment advice and financial planning services to individuals and businesses.
By doing so, you will be able to minimize and eliminate your subjective emotions in the evaluation of all investment decisions. Financial advisors will be in a better position to manage your investment funds due to their objectivity and expertise. They usually assist clients in the planning and arrangement of their financial affairs. They also provide customized solutions to each individual with regards to their financial goals and objectives.
To end off, remember that while Greed and Fear exist in everyone in nature, understanding and managing them does not.”About the Author: