Investment Psychology

We know that interest rates from deposits placed with banks are less than 1 per cent. With inflation, the purchasing power of the dollar will erode over time. How best to grow our dollar for our retirement in this economic climate?


One strategy is to do nothing and hoard cash for fear that principal amount can be wiped out with a wrong investment. As mentioned earlier, this will not grow your retirement fund if you are not economically active or employable. However, this could be the best approach now for some, if they have no stomach for risk appetite. Most investment asset classes have lost values since 2008 and those who have not invested will be happy.


But doing nothing cannot be forever. At some point in time, we have to consider investing again. Is this the right time?


Let’s consider one asset class, equity. Equity has proven in history to bounce back after a period of downturn and can reward handsomely over longer term. The corporations’ fortunes are intricately correlated with the economy. When economy shows signs of growth, corporations’ performance will move in tandem.


The weaker corporations will slowly be exposed and in some cases will go into liquidation under harsh economic climate. Those corporations that can withstand this credit and economic crisis right now will emerge stronger and move ahead of the competition in the future.


Once we have identified corporations that are resilient through our research, the next question is when to invest in them.


If we were to put a label to the mass psychology of investors now, we can possibly look at timing of entry into the market.


Investors have clearly passed the Denial and Disbelieve stage of emotional feeling cycle. Economy is bad, period. No one will dispute that. There is genuine Fear and Desperation among investors and that have driven down the stock markets since September last year. Is there a Panic yet resulting in Capitulation of shares? I do not think we have reached mass Panic or Depression yet. Once we passed Panic and mass Depression stage, shares will have bottomed out and there will be buying opportunities for good corporation shares.


Written on 3/11/2009 10:42 AM


Copyright © 2009, the author known as LKT in Singapore.


The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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