The loss of $1 is twice as painful as the pleasure derived from a gain of $1.
By Dwarka Lakhan |
So you got a closely cropped haircut when the markets tanked. You’re not
thrilled but have some comfort in knowing that it’s kind of in style. But
it’s really not your style. Now you’re wondering what went wrong because
you’re hurting. You can blame whoever you want – the markets, your mutual
fund company, advisor or even the government. Why not those crooked folks
who cooked the books?
Ever thought about sharing the blame? You followed the herd, even though
you fully knew that all things that go up eventually come down. You let
your emotions drive your investment decisions, forgetting about market peaks
and valleys. Now you’re in the valley looking up at the peak, which is
really where you want to be. Don’t beat yourself up. You’ve got company.
Typically, whether you’re conservative or aggressive, you’re likely to fall
prey to your emotions. Investors are inherently more optimistic when the
markets are going up and more pessimistic when they’re going down. One day
they’re chasing after hot stocks, next they’re heading for safety. In
essence, they’re as unpredictable as the markets in which they invest.
Some are hurt by being too defensive, others by being overly aggressive.
Yet some are able to stay the course by following a plan to get where they
want to be. In essence, there is risk in not taking risk and risk in taking
too much risk. Somewhere in between lies a balance that can be found in a
diversified portfolio - one that can weather market volatility.
When building a diversified portfolio, make sure that you’re comfortable
with the potential for the investments you choose to vary in value over the
short term. Although all investments may fluctuate in value at one time or
another during different phases of the business cycle, some have a greater
degree of variability. Your goal is to be able to sleep at night without
having to worry about losing your hair again. Otherwise your emotions will cause
you to change your investment decisions and you might very well end up at
square one again.
Remember, plans don’t come in one-size fits all. You’re different and
need a unique plan that takes into consideration your own circumstances,
goals and timeframe for achieving your goals. That’s the only way you’re
going to climb out of the valley you’re in.
There’s another thing you can take comfort in. Even the savviest of
investors are vulnerable to behavioral traits anchored in human psychology,
sociology and anthropology. And you’re no different. A wide body of
research in behavioral finance shows that investors consider the loss of $1
twice as painful as the pleasure received from a gain of $1. That’s why
they take more risks to avoid losses than to realize gains. They end up
buying high and selling low, contrary to conventional wisdom; which is
probably what you’re thinking of doing now that you’ve lost your hair.
The key to regaining your hairstyle is to stick to your plan, or the
other time around you will pull out your hair all by yourself. And by then
you might not be able to afford to join the "hair club."
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| Dwarka Lakhan is the Editor of CRA Magazine. He is the President & CEO of the Caprion Group of Companies which provides integrated consulting services to the financial services industry.
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