When an investment is the darling of Wall Street–making headlines, doing very well–many people want to invest more of their money in it. This leads to the essential error of emotional investing: buying when an investment is popular and the price is high. Here’s your clue: if everyone is queueing up to buy one thing, then the resulting long line is not the line you want to wait in. Yet so many people will see that long line, and feel more confident in their decision to buy this much-sought-after investment.
However, the way to make money by investing is to buy at a low price and sell at a high price. This means buying in when an investment is doing poorly and most people are selling, then selling when the investment does well and most people are buying. Logically, it makes sense. In reality, it can be painful.
This is one of the most common psychological traps when it comes to investing. It’s what makes smart investing so difficult, even for smart and capable people. For individual investors, successful investing requires a great deal of discipline and very contrarian thinking. Quite simply, good investing feels lousy. It means selling what everyone wants and buying what nobody wants. Making those decisions, over and over, to go against the crowd and against one’s own emotions is difficult. For this reason, discretionary money managers who act on the client’s behalf can help immensely because they remove the possibility of sabotaging one’s logical strategy via emotion (of course, said money manager must be a fiduciary, someone who is legally required to act in their client’s best interests).
For sustainable growth, create a diversified portfolio that samples from a balanced basket of stocks, bonds, and commodities. Adjust your investment strategy to take on an amount of smart risk that is appropriate for your situation while allowing your assets to grow to their full potential. The way to make money by investing is to embrace a long-term view.