Learn investor behavior - How to ride stock market sentiment?

As there's lot of pessimism prevailing in the stock market, I’m forced to right this article which will guide and help retail investors in selecting best investment course for themselves.

No matter how expert are you? But you tend to take emotional decisions to pick right investment for your self and today’s article would help in understanding investor behaviour in stock market.

Investor Behavior

As depicted in the above fig. , it’s the “Optimism” which drives every investment that you do. Be it stock market, reality, fixed deposit, ULIP, it’s your optimism which leads you to invest in any of the financial instruments.

Once your decision pays off and becomes reality then excitement, thrill and euphoria takes over and drives the investor sentiment. At that point of time investor shows overconfidence due to the success he has made using his investment decision, stock market is at it’s pick and making quick money for the investors. He starts believing every research report, news that he understand and starts taking larger investment exposure. This situation is largely driven by the Euphoria in the market and it’s the “Point of Maximum Financial Risk” for the individual.

Once the rally is over, soaring market calms down and tries to level off that is to balance out the premium at which market was trading due to euphoria VS actual valuation based on earnings. This leads to Anxiety, Denial and Fear in the Investors which was totally bullish and riding through market sentiments. At that point of time investor feels that “I’m a long tem Investor”.

As the market continues to fall, the same investor starts feeling desperation, panic, capitulation, despondency. This is time when investor feels that, “This is not for me.” He tries to sell his holding in the stock market even at enormous loss as he has suffered huge erosion of the wealth. Investors become depressed about the stock market and there’s lot of negative news floating around which keeps them away from the stock market. But dear investor, this is the “Point of Maximum Financial Opportunity.”

When I look at the current situation, there’ fear prevailing in the stock market due to U.S. downgrade, U.K. nations hanging bankruptcy issue, U.S. double dip recession worries, inflation in emerging markets and local political issues in India. It has turned into panic selling globally but despondency and depression is yet to come. Does this mean it’s not the right time to buy? Well, no one can time the market, as we’re in bottom cycle of the stock market, I would advice to start accumulating stocks/businesses in your portfolio from the longer term point of view with the knowledge that it could go down more.

Hope this article would help lot of investor and guide through this turbulent time. You can also check my article on "Risk VS Stock Market" to understand are we at risk by not investing in the stock market?

Happy Investing!!