Second, investors sabotage their own success by allowing their emotions to drive their decisions. Instead of developing a sensible long-term investing program consistent with their emotional and financial ability to handle market volatility, they panic during times of financial crisis abandoning their investments only to jump back in after the markets recover significantly and they have determined that “the coast is clear”. Not surprisingly this behavior inflicts permanent damage to an investor’s portfolio.
The conclusion of various behavioral research studies is clear: An extended market rally leads investors to believe that prices will continue to rise and so they accelerate their share purchases. Furthermore, the good times provide a false sense of security so they believe they have a greater tolerance to handle investment losses than they actually have. Unfortunately, for many investors, it is during a prolonged and painful bear market that they recognize their true risk tolerance.
Investing involves risk. The most important decision an investor can make is how much of an investment loss they are willing and able to handle. The time to make this assessment is before you begin your investment program rather than during times of euphoria when the markets are soaring or despair when they are declining.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.