Sure you’re emotional. Everybody is. But when it comes to managing your investment portfolio, your emotion can be a treacherous – and costly – villain.
If you’re like many investors, you like to watch or read the news to stay current on the market. Trouble is, reports are sometimes overstated (not to mention loud), the best if not only way to entice worry-prone eyeballs in our age of media saturation. You watch and you naturally react, wanting to catch the latest rise or bail out of the latest dive.
Take this recent USA Today headline: “What to watch: Is bubble talk rooted in reality?” The first three words of this article are “Bubble. Bubble! BUBBLE!” Regardless of whether you continue reading, the impression sticks of a hyped yet fragile investment trend.
Rational analysis of market conditions often vanishes the second that money is at stake – and, looking objectively at markets’ histories, we all know that nothing spells risk quite as effectively as “bubble.” To take such bait is only human nature.
A recent survey of investors and financial advisors also highlights how emotions constitute landmines when you try to grow your money. For example, almost 60% of investors surveyed worldwide have no financial goals, nearly 70% have no financial plan and close to 80% go on what the survey confirms as “gut instinct” when making investment decisions.
Note: Almost three in four investors (73%) say “they are confident that their portfolio is based on their personal goals” when most investors admit to having no goals in the first place. Other findings:
- Aside from volatile global markets, most financial advisors (83%) say clients reacting emotionally to the markets pose significant challenges to both the advisors’ businesses and client success.
- Also, few investors can connect behavior and investment success: “When asked if putting their emotions aside could better enable them to meet their financial goals, only 6.4% of the nearly 6,000 respondents answered yes.”
So your chances of making a bad investment decision based on “gut instinct” seem pretty high. At our firm, clients also sometimes want to deviate from a successful investment plan because of stories such as the one above – essentially letting emotions rule investment decisions.
History shows that selling when you feel fear at market lows and buying when you feel greedy during market highs generally leads to poor results. Once you veer off the predetermined path, in our professional experience you likely see substantially worse investment results than if you stick with your plan.
The best deed we did for many such clients: simply told them that deciding with emotions is a bad idea. We talk through emotional responses to headline news, rationally review the situation and remind clients that our tactics make up a proven system for participating in bullish markets and avoiding bearish ones.
Your financial future rides on these markets. Leave your instinctive – maybe even fun – moves at other gaming tables. There is no place for emotion in the investment world.
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Nicholas Atkeson and Andrew Houghton are the founding partners of Delta Investment Management, a registered investment advisory firm in San Francisco, and authors of the new book, Win by Not Losing: A Disciplined Approach To Building And Protecting Your Wealth In The Stock Market By Managing Your Risk. Additional market commentary and investment advice is available via their websites at www.deltaim.com and www.deltawealthaccelerator.com.
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