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is the tulip bulb mania back in the 1600’s. I’ve mentioned this before in prior articles and it’s an incredible story. Basically, tulip bulbs, yes like the flower, became a token
of wealth. Commoners were spending a bizarre amount of money on these bulbs, some even selling their house to be a part
of the hype. Eventually, as you might have guessed, this all came crashing down and some people lost everything. An even more unique example in my eyes is dating back to the Salem Witch Trials. This also occurred in the 1600’s, proving that herd mentality was super common back then. As I’m sure most of you already know, the Salem Witch Trials were based entirely on hearsay and speculation. All it took was one strange look or action and everyone was assuming
a young girl was a demon-possessed witch. I know it’s humorous to talk about these things several hundred years later, but back then people were seriously concerned and wanted to make sure they were staying with the times. Herd mentality isn’t a bad thing as long as it’s not affecting your retirement. That’s where I would encourage you to
take a step back and look at the big picture. Stick to proven investment strategies that have actually helped people retire. Be sure that you do some research before you
jump into a product that your neighbor recommends to you. There likely isn’t a single person that you know who has all the right answers on what you should do with your own personal investments. I have heard some success stories, but I’ve also heard even more horror stories about listening to a neighbor or even a brother preaching about some start up investment they heard about. If you are in a position where you worked really hard to build up some wealth, please make sure to work really hard in choosing how you invest your money.
RECENCY BIAS
The definition of recency bias is a cognitive bias that favors recent events over historic ones, a memory bias. Think of this as a lawyer’s closing argument before the jury makes a decision. The most recent piece of information is the one that usually sticks the best. How does this relate to
life as an investor? I have found that the most recent events are almost always the ones that worry people the most. There will always be something to worry about. If you were to look back decades or even centuries ago, you would find that those people had worries of their own based on events that they had no control over. Most
people today don’t worry about the struggles of World War I. They worry about the latest fear mongering event that they saw on the news. This goes back to my “buy low, sell high” comment. Many individuals won’t pull the trigger and buy when things are low because
of this recency bias. They might think about
a recent election or something they heard on the news and get hesitant. The psychology
of investing is a complicated topic as you are probably figuring out. I wish it was as simple
as buy when it’s down and sell when it’s up, but there isn’t a single person on this planet who can time the stock market or housing market perfectly time and again. Look in the long-term if you want to have a clear-cut vision of what is best for your situation.
THE MEDIA
When we are talking about the psychology of investing, the news media must be mentioned. If you get too invested in your news network of choice you can drive yourself crazy. It’s so important to stay in
the present moment and have an open mind when you are watching the news. There are several people that you will hear on the news during a recession or leading up to one. I like to call these people doomsday specialists.
They give the impression that they want things to get worse so they will become more popular and get more people tuning in. There’s always going to be someone like that banging on the drum. Whether or not it comes to fruition is a whole different story. Technology is incredible but it’s also kryptonite for the mental health of many people in this world. Be sure not to let the news media do your thinking for you.
The psychology of investing is a topic that books have been written about. It’s hard to unpack everything that the subject entails. Be sure to do some research before you make any major life changes based on herd mentality, recency bias, or the news media. Talk to a financial advisor and make sure they ask you about your goals and what you want your money to do for you. If they start trying to confuse you with complicated products and hidden fees, walk out. The psychology of investing can also play to your mental health. Think about a world where you have your finances situated and a plan put in place for retirement. A plan that considers that there will be recessions and bear markets ahead of you. I have no doubt that it would make your path easier. Don’t forget to have a mind of your own!
FINANCIAL PLANNING
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