Investors are like everyone else - no matter how much information they have and despite the experience and the many deals they have made, their mood and emotions in most cases play a key role in the decision making. Sometimes this will lead to profits, but other times it can generate loss after loss.

One of the greatest investors, Jack Bogle, said “Time is your friend; impulse is your enemy." But patience is only a small part of the psychology of investors that can help them make decisions.

Investors’ moods often lead to market performance in directions that do not meet the fundamental factors. For example, in the event of a sudden loss of confidence in a market or company, investors may decide to withdraw, which will lead to sharp declines.

Greed, fear, expectations and circumstances are factors that determine market sentiment. There are many described cases in history in which certain market sentiments have led to a boom or collapse.

In order to determine their investment strategy as objectively as possible, traders should be aware of the emotions that may overwhelm them. This way they will be able to recognize them so that they do not become their enemies.

“A common market psychology cycle exists that shines light on how emotions evolve and the effect they have on our decisions. By understanding the stages of this cycle, we can tame the emotional roller coaster.” portfolio manager, Sean Hannon, wrote in his article.

It describes the 14 phases of the market psychology cycle:

1. Optimism – A positive outlook encourages us about the future, leading us to buy stocks.
2. Excitement – Having seen some of our initial ideas work, we begin considering what our market success could allow us to accomplish.
3. Thrill – At this point we investors cannot believe our success and begin to comment on how smart we are.
4. Euphoria – This marks the point of maximum financial risk. Having seen every decision result in quick, easy profits, we begin to ignore risk and expect every trade to become profitable.
5. Anxiety – For the first time the market moves against us. Having never stared at unrealized losses, we tell ourselves we are long-term investors and that all our ideas will eventually work.
6. Denial – When markets have not rebounded, yet we do not know how to respond, we begin denying either that we made poor choices or that things will not improve shortly.
7. Fear – The market realities become confusing. We believe the stocks we own will never move in our favor.
8. Desperation – Not knowing how to act, we grasp at any idea that will allow us to get back to breakeven.
9. Panic – Having exhausted all ideas, we are at a loss for what to do next.
10. Capitulation – Deciding our portfolio will never increase again, we sell all our stocks to avoid any future losses.
11. Despondency – After exiting the markets we do not want to buy stocks ever again. This often marks the moment of greatest financial opportunity.
12. Depression – Not knowing how we could be so foolish, we are left trying to understand our actions.
13. Hope – Eventually we return to the realization that markets move in cycles, and we begin looking for our next opportunity.
14. Relief – Having bought a stock that turned profitable, we renew our faith that there is a future in investing.

Of course, in theory and in practice there are many similar cycles, sometimes with the same names, and other times with similar ones, but anyway the most important thing for investors is to apply approaches to help them avoid making emotional decisions, especially in a declining market.

One of the most important fundamental principles for any investor is diversification. This will reduce the risk of losses. Experts also advise to avoid speculative sectors and if there is still interest in riskier investments, they should not be more than only a few percent of the total portfolio.

Another successful tactic would be to buy fewer shares from a company than initially desired. For example, if you want to buy 100 shares of Company X, you can start with an investment of 50 shares. Thus, in case of market decline you, as the investor, will acquire more shares at lower prices. The introduction of this type of discipline and trading methodology can allow investors to better manage their portfolios and achieve higher risk-adjusted returns.

Dividend companies have proven over time to be less sensitive to market volatility. Thus, if shares of such companies are selected, they will certainly bring more peace of mind to the investors.

To summarize, patience is a crucial quality for investors, but an objective approach is also needed to decide when to change the investment strategy. In order for investment decisions to be effective, it is good for everyone to judge for themselves to what extent they can make all these decisions individually or it is better to trust professional advice from a reliable investment adviser or management company.

The article is part of the joint educational project "Alphabet for Investors" launched by Investor.bg and the Management Company "Compass Invest" JSC. The project will last for six months and aims to expand knowledge about investment opportunities in the markets, among people who have interest in trading various financial instruments.