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Markets move in cycles, and often the best time to invest may be when you feel most uncomfortable doing so
Years of stock market turbulence have left many investors poorer but not necessarily wiser and whilst we have seen a significant market recovery and a boom over the last 5 years it appears we are now facing the possibility of more turmoil. Although we are supposed to learn from experience, when it comes to investing, many people make the same mistakes over and over again.
Investing can be diabolically tricky because it plays on our emotions. When our portfolio is growing, we typically feel optimistic and smart. We take greater risks. When it’s shrinking, we feel increasingly anxious and uncertain about our own decision-making ability. We typically shun risk.
Many investors have recently experienced great growth after the losses in the not too distant past, and, find it easy to forget the lessons of yesteryear, this is where greed can settle in and drive decision making. Unfortunately, “greed” is a behavioral trait, not a sound investment discipline. Markets move in cycles, and often the best time to invest may be when you feel most uncomfortable doing so and conversely when markets have been climbing, seemingly without end, it may be time to stop and wait.
Richard Geist, head of the Congress on the Psychology of Investing, puts it this way: “As a general psychological rule, if you invest when you are comfortable, you are investing near the top, or you are getting out at the bottom, because those are the only times you feel certain of the outcome.”1
If you can’t break the cycles of the market (and you certainly can’t predict them), how can you break the cycle of behavioral mistakes? That’s where the value of objective advice may pay off.
Volatile Markets Cause Bad Investment Decisions
The study of investor behaviour teaches us that investors make predictable mistakes, based on simple human nature. For example, our perceptions tend to be based on recent experience, which makes a falling stock look unappealing and a rising stock desirable – regardless of its fundamentals.
As human beings, we also tend to be overconfident in our assessment of our own abilities. We think our investment successes are based on our own “smarts.” Investors in groups engage in herd behaviour, driving the price of stocks to extremes – up or down – without rational analysis.
The Value of Advice
Clearly, it is better to follow a disciplined investment process than to invest according to one’s emotions. But how? That’s where the value of professional advice comes in. The advice may come from a financial advisor, who provides direction, or from a money manager who actively invests your assets – directly through a separate account or indirectly through a mutual fund.
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