Emotions and Investing

A recent Morningstar article listed 20 common investing mistakes and boiled them down to two main categories:

 

 

  1. Letting emotions get the better of you
  2. Not building a plan

 
It’s interesting to me that the second, not building a plan, is probably the biggest reason people suffer from the first. That said, it doesn’t completely remove the way we feel, especially when markets are volatile. I remember working with clients in 2008 when the market was down 40%, and people felt that we were on the verge of market collapse. Telling people in that moment to stick to a strategy may be the right advice, but it doesn’t mean our emotions agree. Now we can look back 7 years since the market bottomed in 2009 (with the S&P index currently over 2,000 from the ’09 low of 676) and see that buying instead of selling would have been a far more profitable move; however, hindsight is 20/20.
 
The chart illustrated below tends to show that as investors, our emotions often lead us to want to do the wrong thing at the wrong time.

 

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