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Wednesday, March 17, 2010

Investor Psychology

A huge hurdle for do-it-yourself investors is handling their emotions in volatile markets. Dalbar proves this every year with their study. In fact, googling "roller coaster of investor emotions" brings up a number of sources for a graphical depiction of the stages investors go through in up-and-down markets, ranging from euphoria to capitulation. I believe spending time with this graph and thinking through the last couple of years - the end of 2007 (euphoria), early 2009 (capitulation)- is worthwhile (I was tempted to say "pays dividends!"). This exercise may be the single best indicator for you on your risk tolerance. Think through the moves you made in your portfolio. If you were happily adding to your portfolio in late 2007 but spending sleepless nights and reducing exposure in early 2009, you were moving in the wrong direction--and grumpy to boot. Your asset allocation was probably inappropriate.

Along these lines, Kiplingers has a neat little quiz on investor psychology at

Happy St. Patrick's Day!!!!!!!!!!!!!!!!!!

1 comment:

  1. I had a number of friends who sold out near the bottom in 2009 when they had reached their maximum tolerance for pain. Of course, it was exactly the wrong they to do. They should have been buying all they could afford. In investing doing the opposite of what your emotions dictate is usually intelligent behavor. Staying the course and periodic portfolio reblancing enforces the buy low sell high paradigm.