Details Of Behavioral Finance

Many investors have bad habits, the risk of drinking too much or too little in their long-term investments; panic selling after a decline of hunting big market, and returns by buying last year's winner. The study of "behavioral finance" provides information on which investors often make costly mistakes ... and then go again and again. The study of psychology, how financial defines a logical explanation for irrational behavior differently.

In his book "Beyond Greed and Fear (Harvard Business School Press, 1999), Hersh Shefrin author describes the common patterns in investor behavior. A rule of conduct, he said, is that investors' s support on the rules of thumb or judgments based on stereotypes.

Beware the Golden Rule

Traditional finance assumes investors make objective decisions on objective data. In contrast, says that behavioral finance that investors often rely on ground rules for decision making. Because these basic rules may be inaccurate to make bad decisions by retail investors.

The classic rule of thumb is flawed belief that high performance is in the past is the best indicator of future performance. Subscribers continuation of this funding error in the mistaken belief that draw power over a period as short as one year, a fund manager, an expert who is out of luck.

Here are some other basic shortcomings:

The losers are always losers. If a stock drops in your portfolio, sell them;

- To attract and retain candidates. Buy more shares to rise;

- Stocks of small cap and foreign stocks are too risky for average investors;

- There is selection of titles that always beat the market

- There are fund managers who always beat the market

Operation of general rules as they are almost impossible, a strong portfolio, or build you keep. Perhaps the most common mistake investors is too commercial. They believe that investment is now deciding the winners, and with great force.

The university told us, however, that the dealers are generally more likely in poor yields. A study conducted by Brad Barber and Terrance Odean ("Trading dangerous for the rich", The Journal of Finance, April 2000). The authors and the stories of over 66,000 investors trading in more than six years to 1996. They found than those in trade with poor performance.

In fact, the most active operators received an average annual return of 11.4%, while the overall yield was 17.9%. How much is the difference in the form of dollars? Applied to an initial assessment of $ 100,000, the lowest cost would be $ 77,464 cost for six years.

Why the investors participating in this type of destructive behavior? Cognitive dissonance is one of the reasons. People tend to see evidence that their beliefs confirmed, so that evidence out of hand. An active investor can get an annual return of 11.4% found that it was good, because its accounts have increased. He ignores the evidence, everything that could buy a simple strategy to maintain and won, and even those who have received the best performance being greedy.

Keeping track

We recommend three strategic directions for the conduct of error to a joint investment to avoid:

First create a long term plan - and stick to it. A solid investment plan to maximize the likelihood of achieving their main financial goals. The plan should continue its long-term needs, objectives and values define how risk tolerance, creating a time frame to determine the target returns of asset classes and to establish the methodology to use and describe a strategic plan.

The plan must be monitored and adjusted according to your changing financial and personal goals. Market fluctuations, advice and thermal spray should never drive your plan.

Look at the second picture. Always put into perspective the performance. each plant should be assessed not only in the context of overall market performance, but also within the wider benefits over time. The goal is to capture the full market return over a long period of time. They may not lead to positive results every three months, but still on track to achieve your financial goals.

The third cost is low. Your goal should be to implement and maintain its strategy at the lowest possible cost. There are many no-load, low-cost funds out there, why more money amid high office?

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