Put Investor Psychology to Work for Your Portfolio

“If you know the enemy and know yourself, you need not fear the result of a hundred battles.” Sun Tzu wrote those words in The Art of War, but they can be applied to other challenges in life, including investing and working to secure your retirement.

There are plenty of good strategies you can use to help build your wealth, and one of the more important involves investor psychology. Investor psychology is one of the most crucial tools any investor possesses. It starts with knowing what you want for the future and having a reasonable idea of what you want from your portfolio. The most successful investors have clear investment goals. They know they are investing for the long haul and are more concerned with putting money away for the future instead of just chasing returns in the short run. These investors have reasonable expectations on what their investments will produce instead of fantasizing about unrealistic returns that simply never happen.

The best investors typically know enough about themselves to understand what’s important to them as they build their portfolios. This helps determine what their investment style is, and they can use that self-knowledge to help build their wealth.

We all have different styles, of course, and this really comes into play when we analyze how much investment risk we are willing to take. Some of us are cautious, while others are far more open to risk. Many of us are more conservative than we think, especially when things head the wrong way, and want to eliminate as much risk from our portfolios as possible. Even those with a moderate level of risk tolerance need to find the right balance, and much of that comes through knowing what our investment style is and what is important to us at the end of the day. This is something every one of us has to work through on our own, and we all differ on how much risk we’re comfortable with. If you know what your investment style is and how much risk you can handle, you’re more likely to find a good balance in your portfolio.

Patience is also important for investors to keep in mind as we try to build our portfolios, and that requires investors to know the psychology of the market. The best investors know they can be patient and wait for investments to flourish over the course of time and bounce back when the market lags. Take Ferrari, for example. When Ferrari released shares to the public, it started off going negative. It’s since roared back, and shares are now zooming up as fast as a Ferrari 488 GTB.

Patience can come in handy, especially as you’re waiting for your investments to move. If you don’t have that type of patience, you might want to add some riskier investments to your portfolio with more immediate results. Again, there’s no right or wrong path here because all of us are in different places with various needs and different styles.

Investor psychology can even come into play in some very surprising places. It can influence when you should invest and when you’re better staying on the sidelines. For example, many shrewd investors avoid doing too much buying and selling on Fridays. There’s simply no way of knowing what will happen over the weekend and how it will influence the economy. Better to stay lean on Fridays.

Of course, no matter how savvy, the best investors are also usually more than aware that they don’t know everything. That’s why so many of them rely on the advice of experienced and knowledgeable financial professionals.

Too many investors overcomplicate things when it’s really better to keep it simple. They should always keep the fable of the tortoise and the hare in the back of their minds and, of course, do their best to imitate the turtle, who pulled off the upset in that race. Relying on what they know about themselves and their goals, investors need to be consistent and stay the course.

We don’t need to change things all the time and make irrational decisions for our portfolios. We need to have the patience and understanding to let our investments do what they are supposed to, even if it takes time. Steady as it goes wins the race, just as steady as it grows can help you work toward your investment goals.

Kevin Derby contributed to this article.