How to Invest in Germany: Psychology of Investing
Our "Investing in Germany" series is designed to make you a true investing expert. In this article about the Psychology of investing, you will learn the two fundamental investing emotions: fear & greed.
Table of contents
This is the last part of the “How To Invest In Germany” series. So far you mastered all asset classes, taxes on investments, the 7 investing tips, and the 8 investing fails. So all you need to master in order to become a truly successful investor is your own mind. As soon as you conquer your mind and are in control of all your emotions, you will see your Investment results improve dramatically.
Psychologically speaking humans have two fundamental motivations that can be applied to the Psychology of Investing. These two are the reason that we are our own worst enemy when investing. Imagine your brain has two sides that make investment decisions for you – a good side (Angel) and a bad side (Devil):
- The Angel is the good side of your brain that wants to protect you. It wants to protect you from the fear of making mistakes or the fear of losing money.
- The Devil is the bad side of your brain that is greedy and tries to get rich quickly while ignoring all rationale. Risk doesn’t matter for the return your devil is hoping to get. He is willing to do anything.
These two emotions can influence your investment decisions in a problematic manner. Similar to personal risk tolerance it depends on your genetic code if you can control your emotions easily or not. Especially new Investors who don’t know about the psychology of investing and face difficulties keeping their emotions in check should seek help from professionals who happen to have a certain clarity that allows them to form a rational judgment.
Otherwise, when your brain is trying to resolve the conflict, you will start to justify your emotional behavior. We see this very often with clients who Invest with us or people who want to invest with us. New investors tend to rationalize their emotional behavior. When that happens, you will start managing your money in a way that feels good, rather than managing your money in a way that is good for you.
To protect you from this and start your Investing career as Successful as possible, let us try to learn more about these two emotions so that you can also learn to control them.
Greed: The Devil on Your Shoulder
Imagine any market (Stocks, Real Estate, Bonds, etc) you can invest in like a sinus wave that is mixed with fear & greed. When markets rise, many Investing Fails like Fail #4: Buying What’s Hot & Selling What’s Not and Fail #5: Listening to Investment P*rn come together to make your Investing devil speak to you: “Buy now! You are missing out on a great return.”
Your friends are also talking about Investing now and over time, the only one who has no say about investing. Soon enough you are beating Investing Fail #7: Procrastinating and start investing. Of course, you are checking your investments and investment news now all the time because this whole investing thing is exciting and new for you.
And when the market continues to rise, you are making a profit and getting positive feedback. So you devil gets louder and louder. You are starting to think that past performance is an indicator of future results. You are chasing performance. And you start to ignore risk as the devil takes over your Investment decisions.
Fear: The Angel on Your Shoulder
But any given market tops eventually and will start to go down afterward. Nobody knows when a market will top and nobody knows how much it will go down. But as soon as the market tops you will get punished for being greedy. And soon after you will be below your entry level. All that nice performance your greedy devil was so happy about is gone. So your Investing angel is speaking to you: “Sell now! Secure what is left of your money.”
If we come to the Psychology of Investing, that is how we humans are wired. The job of the brain is to protect us. But an Investment decision made from greed or fear is almost always the wrong decision. If you follow the lead of your investing angel, you could sell your investments at the worst possible moment thinking right when the market hits its bottom.
Buying high, selling low. Does that sound like a winning investment strategy? Successful Investors follow the exact opposite. They buy low and sell high. They stay rational and buy the fear and sell the greed. Not the other way round.
Why You Feel Fear & Greed when Investing
Where is this fear of Investing and this stress from rising markets coming from anyway? Imagine you are flying a plane from Germany back to your home country to visit your family. You get to one of the airports here in Germany and take off. You board the plane despite the fact that you know, that your plane might crash.
People die in plane crashes every year. Like there are people dying in car crashes, or just staying home. You are still boarding the plane – like everyone else would do. Because a regular commercial flight is not a particularly life-threatening journey.
Now imagine instead of a regular commercial flight, you fly the plane from Germany back to your home country yourself. Why do you feel fearful or stressed now? Because you are Uneducated about flying airplanes and don’t know what you are doing. And the chance of you dying without knowing how to fly an airplane is pretty high.
But what is the difference between these two scenarios? The journey is the same, the airplane is the same, everything is the same. There is only one difference, and that is the one difference that is creating fear. You do not have the skills or the knowledge of how to fly a commercial airplane – only a pilot does. A pilot possesses the knowledge and the skills to fly you safely from Germany back to your home country.
The Psychology of Investing is the same. If you don’t possess the skills and the knowledge of how to invest, it is a fearful thing to do. We are here to help you on your journey. PerFinEx is your pilot to get you safely to whatever financial future you want to go for. Secure your Free Meeting or text us on WhatsApp and we will do the best we can to fly your plane.
As this is the end of the How to Invest in Germany series, we wish you a lot of investment success. Most people will never get the Financial Education you got in this series. So make the most of it and always remember: With great power comes great responsibility. So take your financial future into your hands.