How you react to financial risk and the stress of uncertainty plays a bigger part in your overall financial strategy than most people would be willing to acknowledge. If you're not aware of your tendencies and your attitude about money and success, you're destined to repeat your mistakes.
Overcoming your reactions can greatly increase your investments' performance.
People feel their losses more strongly than they feel the pleasure of their gains. Investors hate to sell their losses because when they don't, it's just on paper. When they sell, it becomes real.
It's well known that most people tend to follow the crowd. They panic and sell in market downturns and hop onto the hot investment too late. They fear being wrong. Even mutual fund managers sometimes show this tendency.
| Despite the
overwhelming evidence that stocks outperform all other investments over
a long time horizon, some people can only focus on the short-term volatility
and potential loss. They'll check their investments daily or weekly
even though their investment goal is far away.
When people are bombarded with too much information, they take mental short cuts (called heuristics) to try to understand by focusing on just one or two points - often to their detriment.
How do you break these bad habits? Thing long term; ignore short-term 'hype'. Treat your investments impersonally. Work with an advisor who understands your temperament and can help you from repeating mistakes. Have your advisor design a detailed investment policy statement that sets guidelines and strategies to remind you of your goals when you want to deviate from them. Take an active role with your advisor and follow your plan.
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