Recently have been difficult for investors. Some have made the situation worse by buying and selling at the wrong time. For most people, the normal emotional response to rising markets is confident and positive. This can lead to the desire to increase risk-taking and after the purchase of risky assets to potentially high price. The opposite is true for the big market drops. Our emotions can tell us, in a train or to avoid risks, although perhaps the chances for higher returnsis greatest.
For this and other reasons, notoriously poor market timers, individual investors such as fund cash flows are occupied. For example, The Wall Street Journal recently reported that fund research firm, Morningstar, noted that investors are more than 300 billion U.S. dollars of new money contributed to equity in the period of six years from 2002 to 2007, much of it close to market highs . If prices fall, investorsdelivered more than 150 billion U.S. dollars. According to the Hulbert Financial Digest, the total cost of the poor timing for equity investors for more than 42 billion U.S. dollars for the 12 months to 31 May 2009.
As a possible explanation for this behavior could be the interesting work which is being done when the field of neuroscience, where researchers, the brain's response to stimuli study in an attempt to better understand the human decision-making. The results are scientifically confirmed whatBehavioral finance economists suggested for some time: people are not hard-wired to be good, as investors their emotions and other "normal" reactions to their ability to reason rationally and make wise decisions in certain circumstances can overtake.
Brain scans show that there are two parts of the human brain, which in entirely different ways. The prefrontal cortex is the rational, sober part of the brain that is used in long term, the logical thinking. Thelimbic system, on the other side of the brain is short-term, emotional side often leads to difficulties for investors. Under certain conditions, can take over our emotional brain and cause us to, too poor, irrational decisions.
In a study published in 2005, provided researchers at Carnegie Mellon, Stanford and the University of Iowa finds that people with a diminished ability to experience emotions better investment decisions in a simple investment game. The game involved a series ofRounds in which players can decide not whether to invest or to hypothetical money. Each round has been structured to have a positive expected return on investment, so that a rational player willing to invest in each round should be independent of what in earlier. Not surprisingly, the normal, non-affected players were often affected by the recent results and were reluctant to invest after a series of losses. The players with impaired emotional function, and invested more regular basisbetter because they are less affected by anxiety and were more willing to take risks.
That was just a simple game with imaginary money. Imagine how much more could the game in the real world with multiple sources of uncertainty and real money at stake.
Evolutionary biologists believe that humans developed to protect these anxiety response as a survival mechanism against robbers. But in a world where we are not threatened by predators, this fear system over-sensitive,leads us to respond to threats exist, not really. This can lead to irrational decisions and bad financial decisions.
What can investors do to neutralize the impact of their feelings and more intelligent investment decisions? Here are some suggestions:
Stay disciplined - too much emphasis on short-term market movements or popular, may cause alarming market outlook that you develop an irrational feeling of fear. Turn on your investment "noise"have the belief that markets work, and remain committed to your long-term goals.
Diversified will be - a balanced portfolio can smooth the highs and lows, reducing the likelihood that large losses will send your short-term, emotional brain in full swing.
Ignore based the recent past - your brain is hardwired to projections on past trends by finding patterns in the data, even if none exists. This can be very dangerous for your financialHealth. Concentrate ignore in the long run, random, short-term fluctuations.
Write an Investment Policy Statement - you should develop and pursue a comprehensive investment policy statement that your important goals and outlines a strategy to achieve them. Having a written policy makes it likely that a prudent way to proceed if your emotions tell you otherwise.
Rebalance - consistently repositioning your portfolio to target allocationsis a proven way to keep your investment portfolio at a specified level of risk.
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