One of the reasons why many investors fail in their investments is because they are driven by their emotions. This problem is studied by academics who specialize in an area known as behavioral finance.
People make decisions for all sorts of reasons, but when you make an investment decision based on emotion, not fact, you stand to lose your head, heart, and pocketbook.
For example, sometimes investors hear some positive news about a certain stock and they rush to buy it simply because they feel good about it. They haven’t necessarily researched its individual merits, or checked it against their financial plan to see if it fits with their overall investment goals. They just make a sudden investment decision.
Have you ever done that?
Many investors are driven by fear or excitement, and in both cases their surging adrenaline may help them in a “fight or flight” situation, but not with their investment portfolio.
If an investor is too fearful, he could end up either selling a stock needlessly or not developing his investment potential enough. But sometimes investors don’t have enough fear and they become the victims of Ponzi schemes and other scams.
I recently spoke with Professor Meir Statman, author of What Investors Really Want, on the Goldstein on Gelt show, and I asked him why he thought people let their emotions get the better of them. He replied, “People follow their intuition, and their intuition says that they can tell the difference between honest people and dishonest ones. Dishonest people take advantage of precisely that.” (Click here to hear more of what Professor Statman has to say.)
In the ideal world, investors have the time and resources to take a step back from their emotions and properly research financial moves. But in the real world, who has the time, financial background, or desire to educate themselves properly before making rational investment decisions?
What’s the solution for avoiding the pitfalls of emotional investing?
Find an effective and reliable financial planner. A financial planner has the knowledge and background necessary for researching and assessing various investments and finding out which ones are the most appropriate for you and your financial goals. For this reason, it’s worthwhile taking the time and calling your financial planner today.
Having an objective certified professional oversee your investments is the best way to prevent yourself from falling into the trap of emotional investing.Doug Goldstein, CFP®