Market Psychology


Today we are flooded with a lot of information about the economy, stocks, state agencies and foreign governments. They show us charts and graphs for increasing / decreasing oil yield over the last 5 years, the amount of maple syrup produced in Vermont for the past century, the time it takes to get a moon signal, and all the other crap without which we can live without. Speakers of investment programs, both radio and television, tell us how this will affect the prices of some stocks and the market as a whole. Well maybe.

When you step back to get a better picture of the market because the trees are in the way you really have a different look. No matter what stock or mutual fund you own, there is an important factor that makes all of them change. This is the mass-mindedness of all people who hold shares of all kinds. The stock market is a reflection of this massive thinking and causes changes in human behavior. This massive thinking does not necessarily reflect what the economy is doing at any given moment.

Take the buyers' euphoria at the end of 1999 and the beginning of 2000. All of the mass psychology was bullish and everyone knew the market would rise. The economy knew better and stocks fell. The market was a reflection of what we could not see.

Currently, many people turn into bearish and think the market is lower, but no one knows until then. At this point, it is dangerous to be bullish or bearish. So, what is the best way to act when you are not sure what to do with your money? Keep in mind that protecting your capital, especially retirement money, is a primary consideration. If you own a stock that has already risen, you do not want to sell it, but you can protect yourself from loss and block the profit by running an open stop-lone order with your broker. Continue to move stop-up until stocks go higher.

If you have a stock or fund that is down, you either have to sell or order to get out if it goes down. Usually 10% is correct. If your share is $ 40, place a stop at $ 36.

If mass psychology becomes too negative, it can cause massive sales, and even the best stocks turn red. All boats go down when the tides disappear. If you do not have a loss limit at any time, you will lose your investment capital. An example of this was what happened when the World Trade Center was destroyed. The sale was caused by mass psychology and had nothing to do with the assessment.

It's the instinct of a flock, and you do not want to be led to kill all the other stupid animals. Protect your money. Stop today.