The last five years has been turbulent for investors. The subprime crisis, recession, downgrade of the US credit rating and the Greek debt crisis may have caused investors to make emotional decisions with regards to their investment portfolios. It is a natural response for investors to become emotional in their financial decision making during periods of market instability.
Notwithstanding this market instability, there are a host of other factors that influence our financial decision making and arouse a desire within us to “beat the market.” Although these emotional decisions may feel right or necessary at the time, for the most part, your portfolio would be better served by adhering to a less ‘exhilarating’ investment strategy for your money.
Effective investment strategies
Research has shown that despite the investor’s attempts to beat the market, he is rarely successful in doing so, which demonstrates that his investment strategy is ineffective. So, what do the experts say about emotional investing?
Paul Samuelson, the first American to win the Nobel Memorial Prize in Economic Sciences, said the following: “Investing should be dull, like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas. It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.”
Paul’s argument for a dull investment strategy encourages investors to avoid becoming emotional in their decision making. ‘Exciting’ investing has the potential to become both risky and stressful.
For example, if you took a chance and bought a few shares on some advice that the share prices may increase substantially over the next few months, while knowing that there was a great risk involved in purchasing these shares, you would probably watch the markets daily, and every market dip would give you a sharp pain in your stomach and wallet.
This type of ‘exciting’ investing causes emotional decision making, which generally results in us buying high, selling low and losing a lot of money. As Warren Buffet once said, removing emotions is one of the secrets to successful investing. It is critical for investors to remove emotions from their decision making and rather focus on the long term strategy instead of focusing on the short term noise.
One reason why it is valuable to obtain independent professional advice is because such a professional can advise you of the risks and potential returns involved in a given investment strategy without making their emotions a factor in the decision making process.