The Psychology of Retail Investing

Investment psychology is extremely challenging for retail investors. Wallstreet has substantial resources and is organized to both inflict and deal with psychological pressures. Retail investors may often either feel like and/or emulate a pinball within a pinball machine when it comes to making investment decisions and taking sound actions.

To develop a consistent and stable approach to the psychology of investing, retail investors must consider their options. While I disagree with trying to compete directly with Wallstreet’s game, retail investors need to acknowledge this game and determine as to whether they will join in or not. Competing directly against Wallstreet requires an ability to use similar resources and/or develop a level of expertise on par or better.

This decision has very different forms of psychological pressure when it comes to investing. For those competing directly against Wallstreet, what Wallstreet says and does will continuously impact investment strategies. For those not competing directly, most of the psychological pressures will directly relate to investment holding performance goals and objectives, whether daily, weekly, monthly, yearly, etc.

The retail investor, by not playing Wallstreet’s game, has the advantage of separating the timing of Wallstreet-driven price movements from the timing of their investment decisions and actions.

To do this, retail investors must have conviction with respect to their goals and objectives, styles and approaches, and management strategies. Conviction cannot be simply generated, but is a product of working through processes over time as irrespective of investment style, retail investors will be challenged to execute both complimentary and contrarian investment practices. Maintaining conviction in the midst of volatility, instability, uncertainty, etc., is key.  

To successfully maintain conviction, retail investors must go through experiences to learn, while continually recognizing the differences between Wallstreet and retail investing. If I’m a long-term investor, I need to understand why I am investing in a dividend stock versus an aggressive growth stock; I need to know what to expect based on the company’s future potential and how it relates to valuation; I need to be prepared for my holding to drop 50-percent or more during recessions. As a trader, I need to realize that I’m not going to get every trade right and the need to develop and manage my strategies to ensure that I don’t simply 'win some and lose some' will determine my ability to succeed.

A retail investor’s view and recognition of Wallstreet and how it relates to what they are doing will have a big impact on how well a retail investor deals with psychological investment pressures. This type of thinking must be developed and refined over time.