Understanding Your Investing Decisions

Everyone has seen the statistic of what the return of an average investor is and what the return for the S&P 500 has been. So why do we continue to let our emotions drive our investment decisions? It simply because we don’t know we are doing it most of the time. Here are some of our common behavioral investing mistakes:

Loss Aversionr
In the recent market down turns I have spoken with many investors who are hanging on to that stock that they picked until “it comes back”. What does that even mean? People hate to lose.

Individuals would hold on to an investment for the simple fact that they don’t want to lose. They can still rationalize purchasing that investment as long as they don’t sell it until “it comes back”. Many times they will pass up much better opportunities just to make sure they don’t lose.

Mental Accountingr
This is simply treating money differently depending on the source. An individual that inherits $100,000 may feel that they should invest the money far more conservatively than say their retirement funds. The only reasoning is that they don’t want to lose “grandpa’s money”.

Under normal circumstances most people would agree that they should diversify their assets but give them some lottery winnings and watch out. It could all get invested in the next tech stock instead of taking a look at their current portfolio and adding to their prudent investment strategy.

Recencyr
It is difficult to ignore the recent market volatility and some investor may even completely avoid the stock market permanently. Two years ago however when the market was returning double digits everyone wanted to be in the stock market with every dollar they had. If you ask anyone they will tell you the golden rule of investing: “Buy Low. Sell High.”

This simple rule of investing becomes difficult when your emotions get involved which is why the average investor’s returns dramatically lack the market indexes.

Developing a sound investment plan is important and even more important is sticking to your investment plan. Taking a step back and looking at your money as if it were not yours is the best thing you can for yourself. Try to realize your behavioral tendency before it cost you.