Hey everyone! Hope everyone’s having a great summer. It’s been a busy couple of weeks in the Panther household. Today, I’ve got a guest post for you from Anum Yoon who blogs over at Current on Currency. In her post, she talks a bit about the psychology that goes into investing. While I don’t recommend investing in individual stocks, her overall message works well for us index investors as well. Enjoy!
Many people believe they invest rationally. After all, most stock market investors want to realize a profit. That’s the entire point of stock market investing.
But research into human psychology indicates that investors are profoundly influenced by thoughts that are not necessarily rational. Over time, experts agree on the most rational strategy. Choose stocks wisely. Buy and hold for the long term. Reinvest dividends. Choose a fund that tracks major stock market averages like the S&P 500 rather than buying one or two stocks, to lessen your risk and maximize gains.
Buying and holding with a long-term view ensures that you do not sell at a low point by overreacting to a stock market slide that, in hindsight, turns out to be a minor dip in a basically upward market. In the U.S. stock market, pullbacks have been followed by gains steadily since the 1950s. Buying and holding ensures that you realize those gains. It also ensures that any reinvested dividends will contribute to your eventual profit.
Many investors, however, work against these principles due to the power of their thoughts on investment strategy. Read on to find out how.
Selling Winners
Psychologists have determined what they term a “disposition effect” that has a marked pull on investor trading. The first part of the disposition effect is a tendency to sell a steadily advancing stock rather than holding onto it.
Now, investors should be overjoyed to see a steadily advancing stock, since it means they have a successful investment. And if they are aware of the merits of a buy-and-hold strategy, they should do anything but sell a winning stock.
Yet many investors do. Observers believe this happens because the people affected get a kick from realizing the profit. They get a happy, excited feeling when they see the share price rise. While at least some investors can get this kick simply from monitoring the stock and watching the price climb, others want to be able to feel happy about the money by having it.
Selling winners not only deprives investors of potential long-term gains and reinvested dividends, but it also costs them more in trading fees and taxes. So it’s an overall hit to an investor’s financial life.
Keeping Losers
But there’s another part of the disposition effect too. And that’s a tendency to hold onto declining stocks no matter what.
Research has shown that stocks that sink in price are held tenaciously by some investors. We’re not talking about underperformers — stocks that simply do less well than others. We’re also not talking about bear markets, when a large percentage of stocks decline. We’re talking about stocks that fall below the purchase price so investors have lost money.
While the logical move might be to trim losses and get rid of underperforming stocks, people affected by this part of the disposition effect will hold on in the hopes that they will eventually make back their money.
The reason is simple. Losing money is not pleasant. It causes pain. Investors affected by the disposition effect simply want to be in less pain. They feel like they are in less pain if they continue to hold the stock even if, rationally, they are still losing money. Worse, they are tying up money that could be invested more profitably elsewhere.
The Home Bias
A final way in which thoughts affect your investments is the home bias. This is a tendency to buy stocks of companies located geographically close to you.
But is this a bad idea from a logical standpoint? After all, shouldn’t we buy local? Doesn’t it show loyalty to a state, region or specific company?
These can be good things, and of course, a company close to you might be an excellent investment. The concern is that buying only stocks of companies located close to you may result in a portfolio that lacks diversification. Diversification is one of the principles of portfolio selection. A good portfolio should be in different sectors. After all, a group of stocks concentrated only in the technology sector is going to decline when technology goes downhill. Diversification protects against that.
In addition, the home bias may promote buying stock only in a company you work for. But that comes with a risk. If it goes out of business or cuts back, you may lose both your salary and the investment.
How to Protect Yourself
Now that you know about the disposition effect and home bias, how do you protect yourself?
The first way is to make sure you research stocks thoroughly. Identify high-quality stocks. Once you identify some, stick to them. Do not be swayed by aggressive promotion of stocks, such as sales calls. The sales person would be eager to answer questions and provide proper explanations to any questions you may have – if they don’t then it’s likely not a legitimate deal. Do not sell them after they make a profit. Use a buy-and-hold for the long-term strategy. If you invest in a local company, be sure to diversify accordingly.
The second tip is simply not to follow your stocks frequently. Seeing that they have risen or fallen in a given day or week may trigger the disposition effect. Break out of that trap by not triggering. Don’t check your stocks’ progress online every hour or every day. Don’t tune into financial news programs that have a ticker running.
You do need to know your portfolio’s performance, but you need to review it at longer-term intervals. Set a specific time, like once a month or once a quarter. Make prudent judgments. Don’t get excited and sell a winner! Don’t hold if a stock has lost a lot over a quarter.
Although many investors would like to say they make logical decisions, their thoughts may be less rational and lead to investment mistakes. The disposition effect and home bias can negatively affect your returns. To counteract these, research your stocks thoroughly and review your portfolio at long-term intervals.
Anum Yoon is a millennial money blogger who loves sharing insights on investing, retirement, and just plain old budgeting. Check out her blog, Current on Currency to read her posts.
More Recommended Ebike/Scooters
Check out these other ebikes/scooters I've had the chance to do a review for:
- GEN3 Outcross Bike – The GEN3 Outcross is a solid, affordable fat tire ebike that does a good job of doing what I need it to do. It works great for city riding, giving me a smooth ride in all conditions. It’s works really well as a winter ebike since the fat tires give it good traction over snow and ice. Check out my GEN3 Outcross Review.
- Himiway Escape Bike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Bike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($50) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $50 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with $100 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
- Moomoo (5 free stocks) – Moomoo is a free investing app currently offering 5 free stocks (usually worth around $75-$100) if you open an account using a referral link and deposit $2,000. Read my Moomoo referral bonus guide for more information.
- Webull (5 free stocks) – Webull also gives you 5 free stock valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free stocks using Webull.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
- Public (1 free stock) - Public gives you a free stock valued between $3-$70 if you open an account using my referral link.
More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- SoFi Money ($25) - SoFi Money is a free checking account from SoFi. They’re currently a $25 referral bonus if you open a SoFi Money account with a referral link. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Brex ($250) – Brex is a free business cash management account that is offering new users a $250 Amazon gift card if you sign up using a referral link and meet certain requirements. It’s an easy bonus to earn and well worth doing. Here is my Brex Card Referral Bonus Step By Step Guide.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link.Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- Spiral ($50) – Spiral is a fintech bank that's currently offering new customers a $50 signup bonus after opening a free checking account with them. The Spiral referral bonus is especially good because it's a free checking account and doesn't require a direct deposit to earn the bonus. Here is my step-by-step guide on how to earn your Spiral Bank bonus.
- Nearside ($90) - Nearside is a free business checking account that’s currently offering a $40 signup bonus and a $50 referral bonus if you open a Nearside business checking account using a referral link. Filling out the application should only take you a few minutes. And the bonus terms are easy to meet. Check out my Nearside signup and referral bonus guide here.
- OnJuno ($100) – OnJuno is a fintech/neobank that is currently offering a $100 referral bonus if you open an account using a referral link and complete a direct deposit of $250 or more. The account has no fees or minimum balance requirements. Even better, the bonus posts immediately after you meet the requirements. If you can meet the direct deposit requirements, OnJuno is an easy bank bonus that’s worth snagging. Check out my OnJuno referral bonus guide here.
- Fairwinds Credit Union ($100) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- Albert ($150) – If you can manage to do a real direct deposit, Albert is an easy account you can use to earn a referral bonus. Here’s a review about Albert I wrote. And here’s a step-by-step guide on how to earn your Albert referral bonus.
- Fifth Third Bank ($350) – Fifth Third Bank is currently offering new customers a $350 signup bonus after opening a new account and meeting certain requirements. This offer is limited to customers in the following states: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you live or visit one of these states, make sure to take advantage of this high bonus. Check out my post on Fifth Third Bank to learn more.
- Varo ($50) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $50 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
- One Finance ($50) – One Finance is a fintech bank that’s currently offering a $50 signup bonus if you open an account using a One Finance referral link and have a direct deposit of $250 or more. This is a completely free bank account with no minimum balance requirement, so if you can meet the requirements, it’s worth doing. Check out my One Finance referral bonus guide here.
- Netspend ($20 + 5% Interest Savings Account) – Netspend is a company that provides 5% interest savings accounts. If you sign up using my referral link, you’ll get a $20 signup bonus once you make your first deposit into your Netspend account of $40 or more. That means you get a 5% interest savings account and a free $20 to start! Make sure to check out my in-depth guide on how to set up these accounts.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link.
- Brex. Brex is a free business cash management account that is currently offering new users a $250 Amazon gift card if you sign up using a referral link and meet certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $50 for opening an account.
- Albert. A great free app I use to track my finances and save more money. You can also earn a $150 signup bonus if you open a free Albert cash account.
Feel free to send Kevin a message here.
It always amuses me that folks believe that the stock market is rational. It is composed of a bunch of humans making decisions about money, and is thus a very irrational place by its nature. I, too, worry about home country bias. Especially for folks in the US who have never invested when the US was not a dominant international player. The next decades could see some radical shifts. Other areas of the world have their hedging perks.