Greed is one of the most difficult emotions to deal with when it comes to the stock market. It can cause you to do things that you wouldn’t normally do. Remember that one time where you got greedy then when it was all over you regretted buying or selling a stock?
In this post, I want to discuss 4 ways of dealing with greed when it comes to the stock market.
Disclaimer: None of what I’m talking about should be considered as financial advice. It is only for entertainment and educational purpose only.
1. Establish a Plan
It is always a good idea to have a plan for your trades or investments. When it comes to dealing with greed your plan will play a very crucial role. For your plan, you’ll most likely have an entry price range and target price range or market cap range. Your price range is what will help you avoid an extreme level of greed.
For example, let say you’ve done your research on a company and you want to invest in them. The price of the company’s stock is trading at $50. You have your entry price range to be $45 or under and the target range is $80 to $90. When the price of the stock falls below $45 you should be buying but that’s when greed kicks in and you feel like you can wait for an even lower price. Since you have a plan, you’ll think back that any price under $45 is a buy and hopefully that will help you take action instead of giving into greed. The same line of thinking applies when the stock price reaches $80 or higher in the future.
2. Update Your Plan
The market is unpredictable and for that reason, you have to be adaptive. This also includes your plan for the companies you invest in as well. It is perfectly fine to update your entry and target price for a company if there is a good reason for it. For example, if the fundamentals of the company have changed and they are actually doing better than you expected. In such a case, you might be more willing to buy at a higher price but the target price might also become higher. Don’t let your plan become outdated as that will not be of any help to you when you’re being emotional when faced with greed.
3. Realize You Won’t Be Able to Time the Top or Bottom
Unless you can see the future, you’re not going to be able to time the top or bottom for a stock. However, timing the top or bottom is what helps fuel greed. When you’re greedy, you want to buy at the bottom and you want to sell at the top. Once you accept that you’re not going to be able to time the top and bottom greed will have less control. Top that off with your plan and greed should have no influence on your actions.
4. Realize the Importance of Locking in Your Profits
Until you decide to lock in your profits, all you’re getting are paper gains. It can go up or go down. However, if you’re happy with the gains you see then you should consider locking in some profits. Only then will the paper gain becomes guarantee profits.
Remember no one ever goes broke locking in profits. Of course, locking in your profits too early won’t make you rich either. You’ll need to find a balance between taking profits and letting your winners run.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
To learn more about actionable steps you can take during a bear market you can check out my post on navigating a bear market. If you’re new to investing and need a guideline to help you start your investment journey you can check out my post on setting yourself up for financial success.
If you’re having trouble with creating a plan for your investments I have two posts that might help you out. One goes over what to consider when picking companies to invest in and the other is about what to consider to evaluate disruptive companies.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.