| It has been said that the way to earn the | | | | of the market has done really well in the |
| most from your investments is to keep careful | | | | last three months, it is more likely to |
| track of them. But be very cautious before | | | | under-perform in the following three months, |
| accepting this advice at face value; it may | | | | rather than continue its upward trend. This |
| very well create more problems than you | | | | is known as reversion to the mean.Now you're |
| realize.The more you pay attention to your | | | | saying, "Wait, so holding an investment |
| own investments, the more you become | | | | because of poor performance is irrational, |
| psychologically vested in their performance. | | | | but so is holding an investment because of |
| There is a proven tendency to keep an | | | | excellent performance?" The only answer is, |
| investment after a loss to avoid the pain | | | | "It depends." Making investment |
| associated with that loss, or to sell an | | | | decisions based on short-term past |
| investment after a gain to experience the | | | | performance is generally plagued with |
| feeling of a 'winning choice.' This is known | | | | irrational tendencies. However, making such |
| as the disposition effect. Either action | | | | decisions based upon long-term performance, |
| would be an example of using the wrong | | | | relative to the investment objective being |
| criteria for an investment decision, and most | | | | used, is far more appropriate, especially |
| often, it leads to lower overall | | | | when in conjunction with other criteria, such |
| performance.Perhaps you're saying, "Not a | | | | as your time horizon, risk tolerance, and |
| chance! I don't sell my investments because | | | | overall objective.So what can you do to |
| they've done well, I keep them because | | | | prevent irrationality? |
| they've done well!" In that case, you have | | | | |
| just brought up another psychological | | | | Seek the help of a professional!©2005 |
| pitfall-forming expectations of the future | | | | Matthew S. Clement, All rights |
| based on events of the recent past. This is | | | | reserved.Matthew S. Clement is a financial |
| one example of a concept known as herding, | | | | planner and investment advisor representative |
| and it's potentially hazardous. In the | | | | with Financial Network Investment |
| market, there is actually a reverse | | | | Corporation, member SIPC. He provides |
| correlation between the recent past and the | | | | holistic wealth management and retirement |
| near future. In other words, if a segment | | | | planning to individuals and businesses. |