How To Change From A Mindless to Mindful Investor?

Hazelle

What is Mindfulness?

Mindfulness has become increasingly popular in recent years as a way to recalibrate our pace of life and perception of emotions. Fundamentally, mindfulness can be described as living in the present moment and being in touch with your own thoughts, emotions, and sensations. Through mindfulness practices, we become more aware of our own surroundings, directing 100% of our energy and concentration towards life at present. Without mindfulness, we are more prone to distractions and we perform at a sub-optimal capacity.

How is Mindfulness Relevant to Investing?

Mindfulness is extremely relevant for investors! When investing, would you rather make decisions with a mind operating at peak performance, or when your mind is unfocused and wandering? By making more rational and informed choices, we can avoid potential feelings of regret.

Investing is associated with risk and returns, where volatility provides investors with the desired returns. Yet, this volatility naturally raises feelings of uncertainty in us. Humans have an innate fight-or-flight response in the face of threat or adversity. In a market that can fluctuate greatly, even slight downturns can cause fear to build up, urging us to take action and flee from potential losses. Volatility also brings stress, which cognitively makes us less likely to make informed decisions! During times of stress, we are more likely to seek fast solutions to alleviate this stress, rather than objectively appraising the situation and thinking of the best course of action. For example, we may be tempted to adopt panic-selling behaviour, where we sell away our investment positions at a high price because of our assumption of a downward trend. However, this is actually more damaging for our funds because we are contradicting the principle of investing — buying low and selling high.

With mindfulness, we allow ourselves to not only experience these negative emotions of fear and anxiety, but also accept and understand why we feel this way. When we take the time to internalise our natural evolutionary responses, we are better able to make rational decisions that do not sabotage our investment plans. We can build up resilience towards volatility and bolster our stress-management skills while in the market.

How Can I Become a Mindful Investor?

1. Creating a personalised investment portfolio

First, it is important to understand yourself as an investor.

What is your risk tolerance level and investment time horizon? Do you find yourself leaning more towards being an emotional investor or a rational investor? The more emotional you are, the more likely you are to be prone to stress and engage in feelings-driven decisions.

To mitigate some of these effects, you could construct your portfolio such that the volatility is perceptively scaled down. For example, you could start by allocating a higher proportion of your investment funds into index ETFs such as SPY which tracks the S&P 500 index, or large-cap stocks that have a track record of robust financial performance and avoid more speculative plays. Conversely, you may wish to avoid shorting stocks. Stick to this portfolio for a few months to see how you react to market changes and fluctuations in the numbers; be aware of what you are experiencing and thinking. When you start with relatively lower risk, you can accustom yourself to the stress. Moreover, you will be less likely to engage in myopic loss aversion and change up your positions with the littlest signs of a downturn. Sticking to an investment goal often predicts success for you as an investor!

2. Turn off excess alerts

Do you constantly log into your investment platforms to check how your holdings or stocks are doing? By doing so, you are allowing yourself to be a slave to your investments! Constant checking isn’t as beneficial as it may seem — price points change every second but trends cannot be accurately predicted in a matter of minutes. Instead, these short-term fluctuations give you undue stress and an urge to control the market, causing you to make poor decisions such as selling at low prices and buying at high prices. You may even feel an immense sense of regret if a stock increases past your selling price, even though you had already scored an appropriately good selling price!

Invest with a longer-term perspective, and spend just 30 minutes to an hour a day to observe the markets and check your portfolio. It is also far more helpful to turn off the alerts that overwhelm you (e.g. app notifications and news).

3. Moderate reactions to news events

It is indeed important for investors to stay up to date with the market events and new developments for the businesses. However, investors need to learn how to filter out the news that are just ‘noises’ to separate them from the worthy events. News outlets have the tendency to exaggerate events to invoke emotions and attract eyeballs.

Mindless investors may show extreme and impulsive reactions to big news events. Reactions that are too quick and lack substantial justification may not allow you to grow your money and may even make you more vulnerable to buying ‘meme’/’reddit stock’ at high prices. Usually, by the time these hot stocks reach the news media, they are at their peak value and have a high probability of crashing down hard. Thus, the mindful investor would not blindly ride the wave of buying trendy stocks without going back to the fundamentals of the businesses. Instead, they would dedicate enough time to consider the value of a buy — acting on rationality.

Mindful investing is simply about working through feelings of uncertainty and fear, even though it may seem counterintuitive to do so! When we engage in mindful investing, we do not lose sight of what is important for the investment and carry out suitable actions to achieve our personal goals. Mentally, this also helps to alleviate stress as we no longer give autonomy to our negative emotions. When we are able to cross this emotional hurdle, we are better able to cope with volatility and make better investment decisions that bring us greater positive outcomes in the future.

About Hazelle

Chief trainer of The Moneyball Investors Playbook program and founder of The Joyful Investors, a financial education firm that seeks to help avid investors learn to invest better and make the journey a joyful one. I graduated with a first class honors in Bachelor of Accountancy from Nanyang Technological University (NTU) and started my auditing career in one of the Big Four. I believe that once we know how to build our wealth sustainably, we can then live our best lives ever.