Monday, September 13, 2010, AM | 1 Comment
As the old adage goes, “If you can’t stand the heat, stay out of the kitchen.” I think the legendary investor, Warren Buffett, has been quoted as saying “Fear of loss can disrupt sound investment strategies amid high volatility” or something to that effect. When you invest your hard-earned money, make sure you invest for the long haul.
Markets go up and down as we all have seen it all too often. However, investing and fear followed by panic don’t mix. Fear and panic on the part of investors can be considered the root cause of a bear market, among other things of course.
When fear is followed by panic in the market, investors tend to make inconsistent and hasty decisions – yours truly included – that later turn out to be regrettable. They wish they had not made decisions of buying and selling on the basis of emotions rather than some cool facts about the market in general and the securities in particular that they were interested in.
In order to avoid fear and panic followed by hasty and inconsistent decisions, a better approach to investing is to have an overall well-crafted and “balanced” portfolio strategy during periods of severe market turmoil.
“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” – Benjamin Graham, a pioneer in security analysis.
We all want to profit from the market whether it’s down or up. Who doesn’t? Therefore, when you buy or sell, you must look at the facts of the securities and the market at large and make decisions on the basis of solid data and other facts.
It’s all too important that you must have a disciplined portfolio review that considers how various assets should be allocated to suit one’s investment objectives, risk tolerance, and time horizon.
We all prefer to acquire gains and avoid losses. Technically, that’s called loss aversion. Some experts, Amos Tversky and Daniel Kahneman among others, suggest losses are twice as powerful, psychologically, as gains.
Because of this loss aversion, fear followed by panic prevails and even with some help from financial advisers, investors tend to make regrettable decisions. Quite often, as we have seen over the years, investors would liquidate when the market is at the bottom, possibly losing a lot of money and would tend to buy at the peak of the market.
In a Nutshell
Without going into details on how our emotions work – with psychiatrists and other such experts -, try to make investing decisions on facts rather than on fear and emotions that you might later regret why you ever made them. Buying and selling both need cool and sound judgment.