Investing can at times seem like a cruel game. You invest in a stock or mutual fund with your hard work savings in hopes of its future prospects—only to see it plummet right off the bat. Aggravating, huh? Although it may have appeared that way to you, in fact, there are several ordinary (yet preventable) reasons why it occurs.
The Psychology of Bad Timing
It’s not just you. Research has found that even solo investors fall behind the broad market, and much of that has to do with human psychology.
Following the Crowd: Herd mentality
When a stock or investment is on fire, everyone wants to get in on it. Seeing other people make money makes people anxious that they'll miss their own potential windfall so everyone rushes in at their most optimistic point. The only problem is that by that point in time, the investment is normally overvalued and set to retreat.
Recency Bias: Presuming that the Past Foretells the Future
Many investors prefer to invest in that has recently appreciated in price. They view it as “safe.” But that which has appreciated so much has tendency to drop equally fast. This is so for small-cap stocks in general—everyone jumps in on sudden rally, not forgetting to factor in risks.
Risk Aversion and Loss Aversion
Ironically, many investors wait to invest whenever markets turn volatile. They wait for things to stabilize or for things to move in a clear upward pattern. And by that point that makes sense to invest to them, much of that gain has actually happened.
Market Timing: An Illusion of Control
No one can perfectly time the market, yet many try. If you invest when valuations are already high (which is often when people feel most comfortable investing), a correction could follow shortly after. That’s not bad luck—it’s just how markets work.
Mean Reversion: Natural Equilibrium of the Market
Markets have a tendency to balance themselves out from extreme movements. A stock or a fund that has run hard may simply go back to more of a natural growth pattern. Your investment may make it look like it caused a drop, but in fact, it’s simply the market acting normally.
Profit-Taking: The Big Players Cashing Out
When stocks increase in price too sharply, institutional players sell to take their profits off the table. Owing to their size of their positions, their selling has sufficient power to cause a noticeable price reduction. Individual investors like us may get the impression that we're constantly falling behind, but that’s simply part of cyclical markets.
How to Stay Away from Them
- You can’t master the market but master how you invest. Follow these steps to stop believing that your investments are bad luck:
- Invest on fundamentals – Instead of going for performance, invest on sound fundamentals like valuation, earnings growth, and industry trends in the long term.
- Use Systematic Investment Plans (SIPs) – Periodically investing in small amounts of money avoids the impact of fluctuation in markets and excludes emotion from investing.
- Diversify Your Portfolio – Spreading across several asset classes, industries, and geographies minimizes bad timing in any given space.
- Stick to Your Investment Strategy – Stay true to your plan in accordance with your objectives and capacity for risk. Down markets are inevitable; emotional response to these may lead to poor decisions.
- Stop Trying to Time the Market – Not even the greatest investors get everything right all of the time. Instead of investing at only so-called "right" moments, focus on consistent investing.
Final Thoughts
It’s tough to watch your investments go down immediately after you invest, but it’s not necessarily that you’re bad at this investing thing. Markets fluctuate in cycles, and brief drops in price are simply part of the ride. Be patient, invest smart, and have faith in the process—because in the long term, consistent investing succeeds every time.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It does not constitute legal, financial, or professional advice.
