Don’t Let Emotions Get in the Way of Your Financial Plan
Taylor Tepper, a financial journalist for Forbes, writes that when the vast majority of us try to trade stocks for short term gain, we do a horrible job. "We sell them when we should buy," he says, "buy when we should sell, and are overly influenced by the noise around us."1
The problem, as multiple studies have shown, is rooted in our psychology. Our innate bias in favor of our own abilities and our aversion to loss work against us when we determine when to make trades.
Behavioral economists identify Prospect Theory as the irrational belief that something that has lost value is sure to regain it soon. This behavior stems from our aversion to loss and results in holding onto declining assets when the rational choice should be to cut our losses. In the world of investments, it’s the idea that investors place more weight on perceived gains than perceived losses.2
A related phenomenon is known as Mental Accounting. This is the tendency to stash different types of gambles into completely separate mental accounts. As a result, we tend to judge each wager by its own rules, leading us to make special exceptions in contrast to logical decision making.3
It's hard enough to try to beat the market. And when your emotions get in the way of a methodical strategy, your chances of coming out ahead are very low. The best way to pursue potential long-term gains in global markets is to stick with a diverse portfolio guided by evidence rather than emotion. And the best way to accomplish this is with the help of one of our trusted advisors.
2 https://www.investopedia.com/terms/p/prospecttheory.asp
3 https://www.investopedia.com/terms/m/mentalaccounting.asp#:~:text=By-,What%20Is%20Mental%20Accounting%3F,Developed%20by%20economist%20Richard%20H.
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