12 Steps to Drive Emotions Out of Investing Decisions
This week’s AAII Weekly Digest highlights these “must-read” AAII articles:
Investors can often do more harm than good to their portfolios by chasing after IPOs, reaching for yield and not understanding what they are buying. But who knew that a decades-old episode of Leave it to Beaver could offer key investment lessons? Read this article to find out how.
We’ve all heard investors move and think like one big crowd, but Ken Fisher believes there are really two crowds: the main herd and the “anti-herd”—the main herd’s near mirror image. The media often call them “contrarians,” but the real contrarians are those who see through both herds, think independently and do something different. Not opposite! Just different. This is one key to avoiding common pitfalls and investing successfully over time.
There is a large body of research showing that investors depend on emotions and anecdotal information when making decisions. Unfortunately, industry professionals apply techniques and enact policies that encourage investors to continue making emotional decisions. So even if they wanted to drive emotions out of the investment process, the industry is set up to encourage them to do otherwise. To help you make this transition here is a 12-step program to show how to drive out emotions and thus make it possible for you to make superior investment decisions.
Peter Lynch’s 1989 book “One Up on Wall Street” offered investors wonderful insight into the mind of one of the greatest modern investors. Lynch strongly believed that individuals could not only succeed at investing, but they also had a distinct advantage over Wall Street and professional money managers. But Lynch was careful to warn his readers that it was important to first analyze oneself before spending any time analyzing companies. He even provided a list of the most important qualities it takes to succeed.
Our Member Question for this week is:
What would you do if you could increase your chances of improving your investment returns by taking more risk?
Last Week’s Results:
Click here to learn about the results of last week’s AAII Special Question.
Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions. Furthermore, research has shown that investors make these irrational decisions because of certain behavioral biases. Understanding these biases is a useful way of trying to overcome them in your own investing. AAII members have access to a collection of articles pertaining to behavioral finance from some of the leading practitioners in the field.