It’s Thursday and today on MYM360 Are you letting your emotions make your investment decisions? I bring this up because I recently read an article on CNBC, they said that researchers had found some 100 behavioral biases that undercut effective decision-making such as overconfidence when the markets are increasing like they are now and the tendency to go down with the ship when your investments are decreasing because of “loss aversion” when the more appropriate thing to do is to sell the investment and move on.
At the end of the article, they talk about new technologies that are allowing financial firms to gauge client emotions. And, they do this through facial analysis plus the usual questionnaires to determine emotion-connected variables, such as a client’s risk tolerance. Then software analyzes their facial expressions and provides insight into emotional reactions.
If this all sounds a little out there – it might very well be but remember, we all want to make the most money possible with the least amount of risk but even though that’s true when asked about our risk tolerance we sometimes agree to take on more risk than we are comfortable with and we end up shooting our own selves in the foot.
So, what’s the answer if you don’t have a facial analysis to help you out? Well, a good first step is to have a plan for your investments and then find a way to stick to it. In other words, do your homework to pick the best investments for your purpose or goal and then instead of going with your gut, make a plan that includes things like at what point you should sell – that is the price and the timeframe. And, most importantly, what you should do when the market goes down. The operative word here is market. If the entire market is down, then everything is down and it’s generally not a good idea to panic and sell. But if your individual investment goes down all on its own, that could be cause to worry. But before you hit the sell button, try to figure out why it is down and if you think it can recover. That is one of the main reasons to invest in things you understand.
Investing is one of the best ways to grow your money – to make it work for you. But it won’t just happen on its own. It needs you to make rational not emotional decisions to be a winner.
And that’s it for today. Got a burning question? Send it to me at firstname.lastname@example.org and don’t forget to follow me on Twitter @PatStallworth
Thanks for listening and as always remember that minding your money really is the path to a richer life!