Tag Archives: behavioural finance

Stop worrying about short term performance

Stop worrying about short term performance

 

As a financial advisor I see the financials of people from all walks of life. I see some people who have had amazing financial success. I also see people who are on the verge of bankruptcy.

 

There are always striking similarities between the various different people we work with. The one I want to write about today, is how often people focus on their short term investment performance, rather than focusing on the long term.

 

Short and long term investing

 

As I write this, we are a week away from a U.S presidential election. By all accounts it will drastically shift the way the world works depending on its results. Nearly every conversation or phone call I have with clients is them wanting to know how their investments will perform over the next 2 weeks to 6 months.

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Emotional Capitulation and Your Investments

 

We all know that investments go up and they go down. The problem is how we handle the emotional roller coaster of watching our investments decline in value. As I am nowhere near qualified to act as a psychologist, my thoughts and ideas are my own as to why this happens. I base this on having watched hundreds of clients experience this dilemma and have even experienced it myself multiple times.

 

Everyone’s heard of the fight or flight response. It’s that fear response that picks up any time we feel threatened. This can be a physical threat, emotional threat, or in this case a financial threat.

 

When you see your investments going down in value, this fight or flight response kicks in. We have this instinctive reflex to try to avoid as much pain as possible. Our emotional response is to try to do something, sometimes anything, when the rational and logical strategy would be to simply stay put.

 

It’s why we move on from underperforming investments at the worst times and chase the high flyers even though we know we should never sell low and buy high. It’s why when the market is plunging we desperately attempt to time the market and sell out as it’s falling, with an illogical hope of timing the bottom and buying back in.

 

 

Then what can we do about it, and how do we avoid it?

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