Don’t Trust Your Feelings.
Mar 15 2010
Now that the stock market has rallied back 70% from the lows of last March, the pain of loss and the fear what might happen next have been forgotten. Even those investors who sold out last year are beginning to compare recent stock market performance to the meager returns on their “safe” investments and wondering if they should get back into stocks.
Human nature is fascinating. Despite the fact that we all know we should be buying low and selling high, we always seem to feel better doing the exact opposite.
Feelings can be a powerful tool, particularly our intuition. There are countless tales of men in combat who survived ambushes or booby traps simply because they “had a funny feeling that something was just not right.” Intuition also helps us in everyday situations when we get that gut feeling that someone isn’t telling us the truth or something is out of place. We ignore those hunches at our peril.
But the stock market is different. When it comes to investing, that gut feeling is far more likely to lead you astray then help you. We routinely feel comfortable (if not euphoric) at market tops and afraid (if not panicky) when the market is bottoming. What is worse is that our feelings are much more powerful than our reasoning which is why so many people end up buying high and selling low.
There have been three huge rallies over the last twelve years. The first two (up 60% and 100%) were followed by gut-wrenching declines (down 50% and 55% respectively). The current rally that brought the market back 70% from the lows has produced wide-spread feelings of overconfidence among investors (not to mention complacency about the risks). Acting on those feelings is both natural and hazardous.
This is why you need a written investment plan that is customized to your personal situation and based on a proven investment strategy. Without a well-developed plan we are slaves to our emotions – whether we realize it or not. Nearly forty years in this business have taught me that the biggest obstacle to financial success is our own human nature. Ignoring that fact could cost you a lot of money.
