Are You an Emotional Investor?

Becoming a More Rational Investor

Studies by the Investment Company Institute and the Federal Reserve
Board indicate that investors' willingness to assume risk tends to rise
and fall with the stock market (1). Of course, it's not surprising that
people are more likely to pour money into stocks when the stock market
is trending upward and to retreat when the market trends downward.
To become a rational investor, the more important issue may be your perception of investment risk and how much you are willing to assume to pursue your long-term goals.

Behavorial Traits
The field of behavorial finance seeks to understand how and why investors react to different outcomes and events. One study indicates that people tend to have a subjective "reference point" for considering whether an investment is a success or a failure, and they may have different reference points for different investments (2).
Investors also tend to react more emotionally to losses than gains. They feel rewarded when an investment reaches a specific reference point, but when it doesn't their negative feelings about not reaching it are much stronger (3). Fear and anxiety may lead investors to sell when the market falls steeply, as it did in 2008 and 2009, which could result in their incurring a loss on their original investment and missing out on potential gains when the market begins to recover, as it did in late 2009 and in 2010.

If you relate to having some of these emotional reactions, you may want to examine your risk tolerance and consider whether your reference points are reasonable.

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1. Investment Company Institute, 2011
2. Advisorone.com, February 23, 2012
3. Advisorone, com, February 23, 2012The information in the article is not intended as tax or legal advice, and it may not be relied on for the
purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an
independent professional advisor. The content is derived from sources believed to be accurate. Neither the
information presented nor any opionion expressed constitutes a solicitation for the purchase or sale of any
security. This material was written and prepared by Emerald, Copywrite © Emerald Connect, Inc.