If you are an investor, then you need to have the right strategies if you are going to get ahead. Otherwise, you could make common mistakes that could have been avoided. It helps to have a strategy that helps you navigate these pitfalls so that you can enjoy a higher return on your investment. Thus, it is important to understand why a short term memory is not ideal:
Markets are Volatile
In an ideal world, markets would stay the same. They would be the same trend, day in, day out. There would be no dips. Of course, this would not be perfect because then there would not be an opportunity in investing. Everyone would do it because there was zero risk.
Markets are inherently volatile. And the important thing to understand is that markets you see in today’s world are even more. With so much trading happening in seconds and the internet connecting the globe, things have never moved faster.
In can take just hours for an entire market to sway one way or another. That is the primary reason you don’t want to let this dominate your thinking. It is too easy to get distracted by what recently happened and take your eye off of the bigger picture.
They Often Revert to the Mean
The market is indeed incredibly volatile. However, something else is also true. It will always revert back to the mean eventually. It may seem like everything is going up or down one day. Then, the next day, or month, or year, it will eventually even out again. This is just the law of nature that the markets play by. There is no getting around it.
Understanding that the market will average out again is key to being a good investor. It means knowing if your position is good for the coming correction. Whether you need to sell stocks or buy stocks depends on when the market goes back to being in balance.
Investing is a Long Term Strategy
You must have a long term approach to investing. Otherwise, you could fall victim to short sales and other short sighted approaches to investing. It is a long game. If you take a decades long approach, you are bound to get success eventually if you just hold onto your stocks.
No One Can Beat the Market
If you have a short term memory, you might feel the pain from a crash. You might think you can get that money back by beating the market. The reality is that you can never predict the future. It is far better to use proven principles instead.
When you invest your capital, you are hoping that it will bring you the greatest return possible. The last thing you can afford to do is play the market day by day. You need to have a short term memory. Just because something happened today or yesterday does not mean it will hold true into the future. So make sure to use the tips above when investing going forward.