If you manage your own money, consider this- basic human nature works against you as an investor. .

Brain Damage study   A recent study evaluated individuals with a specific kind of brain damage- damage affecting a portion of the brain that controlled the fear response. This study determined that these individuals made far better investors than those without this damage. These individuals didn’t make decisions to sell based on fear, or decisions to buy based on comfort.  These feelings were effectively taken out of the equation.

The impact of our emotional reaction to what is a financial and logical decision, is documented. During a 5 year period ending December 31, 1995, the average growth mutual fund grew by 12% per year, while the average investor return was 2.5% per year! 

Do we act logically with respect to our money, or emotionally?

You get to the theater, and you discover that you’ve lost your $50 ticket…would you buy another one? 44% of those surveyed said no!  Now let’s say that you arrive at the theater and discover that you’ve lost $50 in cash. In both cases it is clear that you’d be out $50, but 88% of those surveyed said that they would buy another ticket. What is the issue here? It is clearly not the money. The issue is attachment- it is the emotional connection to ownership. The root of the problem is ego.

Investors feel the same way about the stocks that they buy. Selling a losing position can feel like admitting defeat, admitting that a mistake has been made. Taking profits can also be a head game. Am I getting the most out of this investment? What if the stock continues to run?   

It is clear that the best time to make investments is when prices are low - a better time than when prices are high.  It even sounds silly. But it doesn’t feel that way. Emotionally it feels more comfortable to invest when markets have rallied, and scarier when markets have declined. We must take our emotions out of the equation to have a system that works.