Why Your Brain May Not Be the Best Money Manager

George Krueger & Mary-Lynn Foster — Mon, 14 Jul 2008 01:52:50 +0000

Morningstar, one of the most respected names in financial information, recently held their annual investment conference.

There was a great deal of discussion about the volatility of the market and how jittery it’s making many investors. Jittery investors like to do something, but the problem is they don’t make the best decisions in troubling times.

We have met the enemy!

One of the speakers was Jason Zweig, who is also the author of Your Money and Your Brain. Our brains can be our own worst enemies when it comes to investing. He said there are two parts of our brain – the reflexive (emotional) part and the reflective (logical) part. The emotional side is ever-present; we have to consciously call upon the logical part.

Obviously, we want to buy low and sell high. The problem is, with the emotional part of our brains running rampant, we may tend to buy high and sell low!

So don’t get in a hurry to sell in times like these. Stay the course if your investment horizon is five or more years, because research shows that a broad portfolio of stocks tends to go up as long as you hold them for five years or more. If you need the money (e.g. you plan to retire or send a kid to college) within the next few years, talk to your investment advisor to determine your best move.

You can make money with a stock that goes nowhere!

Let’s say that you have $100 to invest each month. You decide to invest it in a broad index fund (e.g. the S&P 500).

NOW: Assume that shares of that fund are selling for $20 right now. So you buy 5 shares.

Month 1: Assume the price falls 50% to $10 per share. But you keep investing. You buy 10 more shares with your $100 monthly contribution. So you’ve invested $200 total and your 15 shares are worth $150. You’re in the red. But you don’t care – you’re in it for the long-term!

Month 2: Assume shares of this fund are now selling for $20 again. With your $100 monthly investment, you buy 5 more shares bringing your total to 20 shares, worth $400. But you’ve only invested $300. You’re $100 ahead, even though the share price is the same as it was when you started!

Reacting logically may mean not reacting at all!

It’s very difficult (if not impossible) to predict what the stock market will do. However, research has shown time and again that staying the course is usually the most profitable path for most people.

It’s understandable that you might be worried right now with the market being so turbulent. But don’t panic – react logically … which may mean not reacting at all!

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Why Your Brain May Not Be the Best Money Manager

We have met the enemy!

You can make money with a stock that goes nowhere!

Reacting logically may mean not reacting at all!