An ancient Chinese proverb by Tao Te Ching says "change your thoughts -- change your world." Nowhere is that more true than the area of finance called behavioral finance. Your attitude and assumptions toward money and investing have a huge impact on it.
The best known example is during bear markets, when investors panic and sell out, which is a mistake! If your total portfolio was worth a $100 at the peak of the bull market but only costs $50 now at the depths of the bear market, doesn't that just mean you need to invest more? Is the pain of seeing daily market values so great that you'll pay anything to end it?
But, bull markets cause just as much consternation for some investors as bear markets. In a bear market, you're afraid of losing more. In a bull market, you're afraid of not making more. The investor moves from fear in a bear market to greed in a bull market.
If the Dow went up 8%, why didn't my portfolio go up 8%? First, 40% of the growth in the Dow after the election was due to Goldman Sachs. Without that one stock, you would not have come close to 8%. And, why don't we own that one stock? Maybe, because we avoid money-center banks, due to their books of derivatives. That is a risk that should not be taken. But, who cares about risk, when the sun in shining? Instead of asking how much profit did I make, try asking how much risk did I take?
More importantly, the Dow is only of many market indicators. That are only the 30 largest U.S. companies in the Dow. Why not the broader S&P 500? Nasdaq usually outperforms both of those. And, since 52% of corporate profits come from abroad, shouldn't you compete against that index as well?
Maybe, greed creates myopia? Changing your thoughts fixes it!
The best known example is during bear markets, when investors panic and sell out, which is a mistake! If your total portfolio was worth a $100 at the peak of the bull market but only costs $50 now at the depths of the bear market, doesn't that just mean you need to invest more? Is the pain of seeing daily market values so great that you'll pay anything to end it?
But, bull markets cause just as much consternation for some investors as bear markets. In a bear market, you're afraid of losing more. In a bull market, you're afraid of not making more. The investor moves from fear in a bear market to greed in a bull market.
If the Dow went up 8%, why didn't my portfolio go up 8%? First, 40% of the growth in the Dow after the election was due to Goldman Sachs. Without that one stock, you would not have come close to 8%. And, why don't we own that one stock? Maybe, because we avoid money-center banks, due to their books of derivatives. That is a risk that should not be taken. But, who cares about risk, when the sun in shining? Instead of asking how much profit did I make, try asking how much risk did I take?
More importantly, the Dow is only of many market indicators. That are only the 30 largest U.S. companies in the Dow. Why not the broader S&P 500? Nasdaq usually outperforms both of those. And, since 52% of corporate profits come from abroad, shouldn't you compete against that index as well?
Maybe, greed creates myopia? Changing your thoughts fixes it!
