Property Investment Tips: How to predict market trends

By the resi financial blog team, 27 January 2015

Property Investment Tips: How to predict market trends

Predicting market trends is often thought to be a purely rational process, with many proponents of economic science promoting separation of the emotional self from the logical. While it doesn't help to be overly emotional when making financial decisions, recent research has shown that some emotion can be helpful in predicting market trends, as long as it's under control.

Researchers at the California Institute of Technology (Caltech), analysed the brain functions of traders in experimental conditions and found that those that did poorly had poor control over their emotional responses, while those that did well managed to ignore the stimulus in the brain that signals rewards for certain behaviour.

The experiment analysed how people traded in a market that was heading towards a bubble and then a crash. It found that the lowest earners in the game got overly excited by initial earnings and continued to invest up to and past the peak of the market.

Those who made neither a significant loss nor gain tended to not be very active in their trading strategies and didn't translate market information into action. However, those who earned the most tended to buy early and leave before the peak of the market valuation - actually causing the first stages of the exodus that bursts the bubble.

"The high-earning traders are the most interesting people to us. Emotionally, they have to do something really hard: sell into a rising market. We thought that something must be going on in their brains that gives them an early warning signal," said Colin Camerer, the Robert Kirby Professor of Behavioural Economics at Caltech.

When people are completely rational in trading, it might cause them to miss out on market signals as well as the body language of the people around them. However, having unrestrained emotion is not useful either.

It seems that the magic formula is to be able to identify feelings of unease within yourself and others, and to act on those emotions in a restrained way - even if it is contrary to the reward stimulus from your brain, activated by increased earnings.

However, not all people are created the same, and emotionally distancing yourself from investments does not come easy to everyone. Does that mean that investing in property or shares is limited to only a few who are wired that way? Not at all. With proper guidance, many people can turn averagely performing portfolios into real winners.

According to MoneySmart, enlisting the help of professionals when it comes to your finances can help you achieve your financial goals, avoid expensive mistakes and protect your assets.

The key is to work with people who are skilled at reading market trends and reacting to them in the right way. If you'd like some hints and tips on how to use your investment home loan in the current market conditions, talk to a resi loan specialist today.

Categories: Financial Services, Property Investment