Most people assume that when it comes to investing, the best thing to do is take a rational, unbiased point of view that doesn’t take feelings into account whatsoever. But is this true? Or are there benefits to giving in to those urges to buy and sell when the logical viewpoint is the opposite? And for that matter, is it even truly possible to separate yourself from your feelings when it comes to investing? After all, you listen to your feelings when you decide what to eat for dinner, what to wear that day, and even who to marry.
A bit of over-confidence
A growing body of evidence shows that even if you think you are setting aside your feelings when it comes to investing, you probably aren’t. For example, eight out of ten people will tell you that they are above average drivers (clearly, they don’t live near me). Thinking that they are above average investors too can, in fact, lead to a lack of diversification in investment portfolios. It can also lead to the illusion that one never makes bad investmests—which, of course, is an illusion destined to be shattered.
Holding on too long
“Holding on” may be the best thing to do when it comes to love—but not when it comes to investing. Most people will refuse to sell unless they know they’ll get more than what they paid for it—and that means they hold on to loser stocks and bonds for way too long. How to tell if it’s time to say goodbye? Try not to pay attention to how much you paid for the investment in the first place. Would you buy it again if you had the chance? If not, it may be time. Even professional money market managers generally hold on to their losers too long and get rid of the money-makers too quickly—something to keep in mind when making a decision to buy or sell.
While some people may do all the diligent research required—talking to money-market managers, prudent investigation on the internet, and so on—others of us spend more time deciding what flavor of ice-cream to buy than we do on what stocks and bonds to invest in. It can be overwhelming to be confronted with so many options, but the default option—do nothing—is never the best one. If you’re somewhat confident of your ability to choose investments wisely, limits your options to two or three—then invest in all of them. If not, perhaps you would benefit from talking to a professional money market manager—sometimes they can help clear away the fogginess.
Beware of spin
In the media, how something is presented is referred to as its “spin”. In the same way, people can be manipulated by how data is presented to them. For example, given a choice between a fund that loses money one year out of ten, and one that gains nine years out of ten, more people will choose to invest in the one that gains—though both are the same fund!
In general, it pays to be aware that feelings play a greater role in investing than many of us realize. Happy investing!
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