In investing, our natural tendencies sometimes make it difficult for us to follow fundamental principles. Make sure you understand these tendencies so they don't adversely affect your investment performance:
• We tend to think that the stock market can only continue in its current direction. When the market is going up, we think it will continue to do so indefinitely. Then, we invest significant sums at market highs. When the market is going down, we think that will continue also, causing us to sell stocks at market lows.
• While investors hate risk, we tend to become more risk tolerant when our investments have gains. However, as those gains disappear, we often become more risk averse, since our principal is now at risk. Again, this can lead to selling when stocks are at market lows.
• Investors feel the pain of a loss more than the pleasure of a gain. Thus, we tend to hold investments with losses, hoping to recoup those losses.
• We tend to notice information that confirms our opinion about something, ignoring information that contradicts our opinion. Thus, investors tend to notice only positive information about investments they are interested in.
• Investors often make investment decisions based on irrelevant numbers. For instance, when deciding whether to sell an investment, we will only do so if the price is higher than our purchase price. Even though the purchase price is irrelevant now, we use it as a basis for making decisions. Or we may have first noticed a stock at a specific price, and refuse to purchase it if that price has gone higher.
Don't let your natural tendencies cause you to make investment mistakes. Please call if you'd like help with the investing process.