Psychology of Investing: 2. The Income Mindset

About the psychology of investing series

This blog post forms part of a supplementary guide designed to be read alongside our comprehensive investing guides which explain from start to finish how to invest in various assets:

While these guides do explain how to access those investment opportunities, they don’t cover the topic of mental preparation.

Any veteran investor will appreciate that the mind games that often accompany investing can also have a great impact on investing success.

I’ve written articles about whether now is a good time to invest in the stock market, when investors should buy shares and when is the right time to sell shares. The popularity of those articles leaves me with no doubt that indecision and insecurity play an unwelcome role in guiding our investing judgement.

Don’t fall victim to sensationalist news

In a world as uncertain as the stock market, it’s perfectly natural to look for reassurance and agreement in the media for each investing decision.

However, looking online or in print for agreement is dangerous in a media sphere where cynical financial media journalists have been known to produce two articles predicting gains and losses on the same day.

Confirmation bias is the idea that we’re likely to find information which confirms, rather than challenges our views. This means that regardless of your position, you’ll find it easy to source soothing words of wisdom that back up your gut feeling.

To create a basic investment portfolio that you a) believe in and b) can consistently stick to, you will benefit from an appreciation of the psychological factors that can cause trouble down the line.

This psychology of investing series will comprise six bite-sized articles which will each focus on a single problem (a stressor) or a solution (a mindset). I hope to challenge your views and encourage you to reflect upon how the stresses of investing affect you, and how your portfolio is designed to resist negative urges.

If you’re interested in find out a lot more about investment psychology then check out our ranking of the best investing psychology books.

What is the income mindset?

The income mindset is the frame of mind embedded within the dividend growth investing strategy (a stock selection method) and investing for income (used by those seeking an income in retirement).

In a nutshell, the income mindset says:

  • Ignore the value of your investments. It sounds incredible but this is the central tenet.
  • As value is no longer your reference point, there’s no need for you to obsessively check on your accounts latest valuation. What a relief!
  • Your focus will move to the total investment income your portfolio produces each year. Dividends, rent, and interest all count towards this total.
  • The income mindset involves viewing your investments as units of income. The more units of income you can add to your portfolio, the greater stream of cash it can produce.

Why is the income mindset useful?

The income mindset is a very helpful means to an end.

The successful investing strategy which I promote on Financial Expert, is to slowly and steadily drip-feed your money into a diversified portfolio of multiple asset classes.

The income mindset naturally encourages this pattern of investing because it encourages regular investing in all market conditions.

Each time you add funds to your investment account to buy shares or passive & active funds, you’ll be increasing your expected income. This holds true regardless of whether the stock market is ‘up’ or ‘down. Adding additional stocks and shares to your portfolio will always increase its earnings potential.

However, not all companies pay dividends!

The dividends paid by companies are only as reliable as the companies earnings. Cuts to dividend payments do occur and can be dramatic. However, at a portfolio level, the change in dividend income each year is usually much smoother than its value.

A nudge and a weight off your shoulders

Not only does the income mindset subtly point you in the right direction, but it also takes off some pressure.

We know that we shouldn’t obsess over short term swings in value – they don’t matter over the long term. But if we buy a share on Monday and they’ve fallen in value by Friday, we feel like a failure.

Not the case under the income mindset! Adding a dividend-payer to your portfolio will give an immediate boost to your future investment income. This isn’t likely to change over the short term, giving you fewer reasons to doubt yourself.

Keep reading: The full Psychology of Investing Series:

  1. How to Accept Losses
  2. The Income Mindset
  3. The Dangers of Exuberance
  4. Keeping your Hobby in its Box
  5. Auto-Pilot Investments

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