The stock market fluctuates constantly, whether minute by minute or day by day.  However, a significant amount of the driving force behind these swings is fear and greed.  By avoiding these emotions and becoming a disciplined investor, you can build a portfolio that will withstand the ups and downs of the market.

Eliminate emotions from your trading

Many investors get caught up in greed and the desire to get rich quick. That is a gambler’s mentality. A gambler doesn’t think rationally, instead they rationalize their dangerous behavior and keep chasing the easy windfall.  For instance, in the 1990s, all it took was a startup internet company to get the market excited. Unfortunately, for a while, unrealistic valuations and run ups in stocks were commonplace. More and more people got caught up in the market. There were stock market experts at every water cooler and church in town.  However, this greed prompted stocks to become overpriced, which eventually popped and led to a significant downturn in the stock market. The whole bubble popped when Alan Greenspan gave his irrational exuberance speech. But, people stayed in until the end, waiting for the rebound that never happened. It happened in Japan before here and is happening in China today.

If you get too caught up in the moment and making money quickly, it is difficult to keep your plan stable over the long term.  When everyone else is getting greedy, it is best if you stick to the fundamentals of investing – this protects you from becoming burned when the market falls again.

The other side of the investing coin is fear.  If the stock market starts taking a turn for the worse, many investors will become concerned about losing even more money.  Many will try to dump their stocks in favor of less risky investments, causing the stock market to crash even further.  Again, keeping fundamentals in mind will help you during a time of crisis.  Yes, your portfolio will take a hit like everyone else’s, but you have a better chance of making your money back by keeping it where it is, rather than trying to pull out and invest elsewhere.

The fear and greed that investors have often lead to the instability of the stock market.  Most of the fluctuations are related to the comfort level of investors, who allow their emotions to take control.  However, by investing smartly, you can avoid some of this emotional upheaval.  For example, if you are a conservative investor, you will be more likely to get caught up in the fear of a downturn.  Therefore, your portfolio should contain fewer high risk stocks than someone with a higher risk tolerance profile.  Choose investments that mirror your investing personality.

Avoiding the common emotional mistakes

Most of fluctuation problems in the market stem from the fact that humans are prone to follow the crowd, instead of taking the lead themselves.  Unless you are following someone like the great Warren Buffet, the majority of investors will not be able to help you when the situations turn dire. 

There are several thoughts to bear in mind during trading.  First, you cannot control the market 100% of the time, even if you are as diligent as possible.  Therefore, if you cannot afford the risk, you should not be investing.  
Second, you have to keep your pride from keeping you from investing properly.  Many investors take impractical risks trying to hold onto a loser with the hopes it will turn around, while others will toss out a winner before it reaches its full potential because it was not earning quickly enough.  Both of these actions put your portfolio’s potential in jeopardy through the irrationality of emotions.

Third, you cannot be afraid of the unknown.  Even if a stock is new or a company foreign, that does not mean that it cannot be a good investment.  If you are willing to step out of your comfort zone to go after a good deal, then it will allow you to maximize your profits.

If you are an investor who can keep emotions out of trading, then you can quickly join the ranks of successful traders like Warren Buffett, whose dedication to the fundamentals kept his portfolios growing.  The more you can eliminate your irrational emotions from the stock market, the better your portfolio will fare in the long run.