You can replace “The Government Shut-Down” in the title with “The Greek Debt Crisis”, or “U.S. Credit Rating Downgraded”, or whatever other pessimistic, bad news of the day you choose.
No matter what the crisis of the day is, making investment decisions based on emotion can kill long-term performance. It’s very easy to get caught up in the day-to-day drama of the markets or some current crisis – like a government shut-down – it’s human nature. Average investors dramatically underperform both the market as a whole and the investments in which they are actually invested, according to the Quantitative Analysis of Investor Behavior, an annual study done by Dalbar, Inc.
The father of security analysis and value investing, Benjamin Graham said, “The investor’s chief problem-and even his worst enemy-is likely to be himself.”
Why? The list is long but the mistakes are common: market timing, chasing short-term performance, lack of diversification, investing in fads, or otherwise abandoning their investment plan (if they even had one to begin with).
As destructive as these behaviors are, it is hard to believe that they happen every day, day in and day out. So what can you do to avoid these all-too-common mistakes of letting human nature take over?
Create and stick to an investment strategy and asset allocation. At times of financial stress, do not stray from your strategy because of short-term events. Keep your portfolio aligned with your long term goals.
Remain emotionally neutral toward investments. Fear and greed are the enemies of good investment decisions. They are difficult to resist because of our human nature, however they are the very emotions that cause investors to buy at the top of market cycles and sell at the bottom.
Avoid getting caught up in the herd mentality that causes investors to bail on their investments when things don’t “feel” right.
Investment results are more dependent upon investor behavior than they are on investment performance. Great investors throughout history have understood that building long-term wealth requires the ability to control one’s emotions and avoid self-destructive investor behavior. Discipline and patience, regardless of market and economic events, are two of the best qualities an investor can have.
Asset allocation programs do not assure a profit or protect against loss in declining markets. No program can guarantee that any objective or goal will be achieved
Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions