The Behavioral Investor

Past performance is no guarantee of future performance. This disclosure has to be packaged on every investment vehicle. Even still, most investors have short term memory loss. Many base their investment choices on what has been and not on current events. They forget about rising problems that have been over shadowed or down played. Statistics show the investors become bullish after the market has risen and bearish only after the market has fallen. This is a primary reason of why the average investor cannot beat the market's returns by himself. Emotions get thrown on the table and all the fundamentals are tossed aside.

This is the classic case of behavioral finance. Investors get too tied up in how they feel about a certain investment and lose the buy/sell discipline. Statistics show that investors are prone to sell a winner too quickly and hang on to losers. We feel that if we sell a winner then we can show we accomplished something. As a result, many of us sell too soon in a bull market. We then get back in at the top. From there we buy and watch our picks fall. However, we refuse to sell based on the perception that our investments were good picks and will rebound soon. We hang on to these picks too long and lose more and more money. We then sell at the bottom and sit on the sidelines bandaging our wounds. The market rebounds and we get in too late, thus starting the cycle over again.

Discipline is needed to buy and sell at specific points. We buy based on fundamentals. Once those fundamentals change, we need to sell and move on. We all have our favorite picks. The great investor distinguishes himself by selling those picks and moving on without ever looking back. He takes the emotion out of the game. As a result, he can buy and sell according to his game plan without ever hanging on too long. Many people can pick great investments. Only a few can actually manage those investments effectively.