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Stock Market Pyschology: Greed and Fear

When it comes to how psychology relates to the stock market, there are 2 emotions that dictate most individual investor’s decision: fear and greed. The so-called “Smart-Money” (hedge fund/mutual fund managers) should be making better decisions than the individual investor, but not always.

Fear is rampant when the stock market is in fast decline and it leads people to do crazy things such as sell when stocks have hit their lowest points (ie: the crash of 2008) and they are 10 years away from retirement. Greed is alive and well when stocks are at all-time highs (ie: right now) and it leads people to also do crazy things such as add large amounts of money to their positions when the market is due for a big correction.

The key to being a successful investor is not following the herd when these emotional people are acting impulsively. For example, when the stock market is crashing, you need to be buying and adding to your positions. It’s essentially like there is a 1/2 price sale. You’d be crazy not to buy! And, when stocks are at all-time highs, it’s time to sell some positions, stockpile cash, be patient and get ready for a correction when you can buy things more cheaply.

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