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Has Psychology Stolen Your Investing Objectivity?

It has been said that the way to earn theof the market has done really well in the
most from your investments is to keep carefullast three months, it is more likely to
track of them. But be very cautious beforeunder-perform in the following three months,
accepting this advice at face value; it mayrather than continue its upward trend. This
very well create more problems than youis known as reversion to the mean.Now you're
realize.The more you pay attention to yoursaying, "Wait, so holding an investment
own investments, the more you becomebecause 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 anexcellent performance?" The only answer is,
investment after a loss to avoid the pain"It depends." Making investment
associated with that loss, or to sell andecisions based on short-term past
investment after a gain to experience theperformance is generally plagued with
feeling of a 'winning choice.' This is knownirrational tendencies. However, making such
as the disposition effect. Either actiondecisions based upon long-term performance,
would be an example of using the wrongrelative to the investment objective being
criteria for an investment decision, and mostused, is far more appropriate, especially
often, it leads to lower overallwhen in conjunction with other criteria, such
performance.Perhaps you're saying, "Not aas your time horizon, risk tolerance, and
chance! I don't sell my investments becauseoverall objective.So what can you do to
they've done well, I keep them becauseprevent  irrationality?
they've done well!" In that case, you have
just brought up another psychologicalSeek the help of a professional!©2005
pitfall-forming expectations of the futureMatthew S. Clement, All rights
based on events of the recent past. This isreserved.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 thewith Financial Network Investment
market, there is actually a reverseCorporation, member SIPC. He provides
correlation between the recent past and theholistic wealth management and retirement
near future. In other words, if a segmentplanning to individuals and businesses.



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