Feeling Good About Your Investments? Here's Why That Could Be A Bad Sign

Bitcoin (BITCOMP) investors may remember this feeling back in December 2017, or cannabis investors may remember having it in 2018. Many electric vehicle stocks investors have likely been feeling it throughout 2020.

Emotional Rollercoaster

A trader’s first reaction when a buy turns profitable will be a feeling of joy. It is natural to think, “This is easy, I'm great at picking stocks.” The challenge at this point, the peak in the investor sentiment cycle, is to not make the mistake of buying more expensive shares.

This period of the cycle comes with feelings of confidence and excitement because the rise in share price has provided positive reinforcement for the purchase. It is a fun experience, and it’s natural to want the fun to continue. Yet this is the point in the cycle when Buffett might be selling. As a stock price starts to fall, investors will initially rationalize the drop as simple market volatility, a healthy correction, or just a bump in the road.

The further it falls, the more that denial turns to what can seem like an overwhelming sense of panic and regret. Those feelings often correlate to the trough in the sentiment cycle. When you feel like the most foolish person in the world for ever having bought the stock, it may be the exact time Buffett or other savvy investors are getting greedy.

Benzinga’s Take

Unfortunately, when investors are successful, they often become overconfident. This overconfidence leads to more risky investment decisions, often at the worst possible times.

There’s certainly nothing wrong with being confident in your investment acumen. All investors, but particularly younger and newer investors, should remember that there were plenty of investors feeling like geniuses at the peak of the dot-com bubble, at the height of the subprime mortgage bubble, and with the S&P 500 at all-time highs prior to the coronavirus pandemic in early 2020.

If you were fortunate enough to buy or add stocks at or near the 2020 market bottom, congratulations. But remember that the better you feel about your investments, the more you should be on the lookout for a potential market top.

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© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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