Investment brain training can help make you rich

Fear, greed and another emotions can cause bad decision-making in investors, so here’s how to get your mind right for the job.

Investment successes and failures mess with peoples’ minds, and 2022 is likely to see some serious brain-bending action.

Booming property and sharemarkets in the past two years have lured many more people into the investment world, and have lulled many into a false sense of security as gains multiplied.

A big test will come when asset prices inevitably fall suddenly and sharply, but there are ways to train your brain for investment success.

Australian Shareholders’ Association director Lelde Smits says it’s human nature to want to follow the pack, but also one of the greatest risks.

“When training your investment brain you should aim not to automatically buy into rising markets, or sell into falling markets, but make your decisions based on the company’s fundamental value,” she says.

“Having a mindset of learning is the most important tool to equip you with the knowledge about how you can create and build wealth.”

Smits says her top brain-training tips for investors include:

• Create a personal plan aligned to your individual goals.

• Embrace discipline and have firm boundaries on when you will buy and sell assets.

• Understand the impact of emotion, and aim to make objective and rational decisions.

• Remember the power of humility to protect you from overconfidence.

Australian Shareholders' Association director Lelde Smits says education is important.

THINK ABOUT THE FUTURE

Smits says focus on the future when deciding where to invest, and remember that while markets will always go up and down, the power of compounding returns over time remains.

Catapult Wealth director Tony Catt says people often anchor their investment minds to past events.

“We always look at what has happened and we don’t see where we are going,” he says.

This can result in buying riskier assets just when they are peaking, or selling out of investments at the bottom of the market and missing the rebound.

“Whether you are winning or losing, it’s about having a calm and rational thought process,” Catt says.

Be disciplined and, unless you’re a day trader, there is no need to look at market moves every day.

“Maybe look at it at the weekend – don’t sweat the Monday to Friday stuff,” Catt says.

“And don’t bet the farm. Making smaller investments more regularly is a good discipline to have,” he says.

Behavioural psychologist Phil Slade says training your investment brain begins with familiarising yourself with investment platforms, trading terms and other financial knowledge.

“With practice comes familiarity, and that familiarity drives down fear,” he says.

CONTROL YOUR EMOTIONS

Slade says people will become better with experience, should only invest in things they understand, should speak with friends and family who also enjoy investment.

“Normalise it and you will become less reactive,” he says.

Try to understand an asset’s value before you see its market price, Slade says, and you don’t need to be an analyst, trader or “know all the lingo” to do this.

He says people’s brains have a status quo bias, believing what happened in the past is likely to keep happening.

“The reality is there’s no correlation between past and future.”

When things turn sour, be in control of your emotions rather than let them control you, Slade says.

“Nothing good comes out of panic or fear,” he says.

“Just dial back your anxiety to concern or vigilance and become more emotionally intelligent.”

Slade predicts more volatility in financial markets this year as people’s brains bounce between “we’re out of the pandemic, we’re not out of the pandemic, we’re out of the pandemic”.

Behavioural psychologist Phil Slade says nothing good comes out of panic or fear.

MIND SKILLS OF SUCCESSFUL INVESTORS

• Dollar-cost averaging: Buy assets in small bites, perhaps every month or two, instead of one big lump.

• Ignoring the herd: It’ tempting to follow the crowd, but the best gains often come to those who don’t.

• Always learning: There’s a mountain of free information, guides and lessons for investors online.

• Diversification: Reduce risk by investing in different companies, countries and asset classes.

Originally published as Investment brain training can help make you rich