The Fear Factor: The True Cost of Emotion-Based Investment Decisions

by Stacy Francis, CFP®, CDFA

I am very intuitive, said a new client over raw food downtown yesterday. Thank goodness I can finally eat Sushi again. While I was pregnant this food was strictly off limits. Anyways, my client told me that she always listens to her gut when determining when to buy and sell. It has never been wrong in any other aspect of her life, yet she keeps losing money. Any idea why this could be? 

I do have an idea, and I think it’s important enough to mention to the rest of you as well. The reason following her gut in investment decisions is getting my new client nowhere is that gut feeling is a biological function designed to keep you safe. So when things start to get shaky in the markets, it will tell you to pull out. When indexes start to head north again and others around you start to make money, it will pick up on their sense of security and conclude that it is safe for you to re-enter.

In essence, you will end up buying high and selling low – one of the worst investment strategies imaginable. Statistics show that it is not unusual for investors who move in and out of the markets to underperform major indexes with 1.5 points.  

I’m not saying you should ignore your gut, because it is useful in so many other aspects of life. Sometimes, it can be a lifesaver! But when it comes to investing, it’s all about the rational. Draft a long-term strategy, stick to it, and – with the exception of your annual or bi-annual portfolio review – leave your money alone. You are much better off using that gut feeling to improve other aspects of your life.

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