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