How To Avoid Investment Problems

We are all emotional

Emotions drive action. Could be anger or fear or greed or almost any of the deadly sins. In times of market adjustments we tend to multi-task them. Weak decisions follow. 

Daniel Kahneman and Amos Tversky

These two are psychologists and had it not been for Tversky’s death, both would have been awarded the Nobel memorial prize in economics. Kahneman alone was. Their findings around decision making has become important as “Behavioural Economics”

A simple observation

When I first began to take the Chartered Accountants course one wise professor offered important advice for dealing with clients.

“There is such a thing as a paper profit, but all losses are real”

Losses trigger fear and insecurity

We act because that is what emotions make us do. If we all behave the same fearful ways, the stock market would quickly reach 0.00. Fortunately some people begin to see the futility of fear and start to buy when it is down enough. They are the semi-rational.

The rational held some cash when things were good, and more as they were more good. When the market took a hit they were ready.

A test

No doubt you are the superbly disciplined investor who has absolute emotional control. Seldom fearful. Never greedy. 

We’ll see.

Suppose at a New Year’s Eve party you discover I am an investment advisor. You like what I seem to know and you offer me a deal. You will give me $100,000 to invest as I see fit for 12 months. Next New Year’s Eve we will meet and review the outcome.

Next year your $100,000 is worth $2,000,000. You are understandably pleased and agree to commit the money for another year.

At the end of the second year, your account is $300,000.

The test: 

After the second year, would you introduce me to your friends as the guy who tripled your money in two years?

I doubt I would even be your friend any more

Objectively, triple your money in two years is an amazing result, but losses are real, regardless of how they came to be.

Understand that your emotions get in the way and they are triggered by the vagaries of the stock market’s pricing mechanism and the pundits who take advantage of our fragile emotional nature.

The more often you look, the more often you will be disappointed.

A second Kahneman observation. 

A loss is feels about twice as bad as a gain of the same size feels good.

We are all emotional. You need a defense. Have reasonable objectives. Don’t pay much attention to the pricing noise. An advisor could help.

It is hard for you to soothe yourself.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

This entry was posted in Investing, Personal Finance and tagged , , . Bookmark the permalink.

One Response to How To Avoid Investment Problems

  1. Calvin says:

    Excellent article. Thanks for sharing.

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