Here's the scene: You just opened your retirement account first-quarter statement and one of the stock funds has a big gain (this is a hypothetical scene). As a result, your account balance is up quite a bit. How do you feel? According to Jason Zweig, author of "Your Money & Your Brain," you probably feel euphoric. Pretty powerful stuff those investment gains!
Perhaps it should come as no surprise then, that it can be difficult for some of us not to chase performance. Especially after suffering through the recent recession, potential gains are hard to resist. That stock fund that had a big gain - we want more. We might transfer money out of a so-called "clunker" stock into what we think is the "big winner" stock. Out the window goes our long-term strategy, risk tolerance and asset allocation.
Now it's July and you rip open your second-quarter statement, expecting more gains from owning even more of the "big winner" stock. BUT, instead, you have a loss - you think that stock fund is now a "clunker." Now you're probably not feeling so great. Scientists say financial losses are processed in the same areas of the brain that respond to mortal danger. In a response to fright, some people may take all their money out of stock funds and stick it in a money market or stable value fund, hoping it will be "safe."
Chasing performance - choosing investments based only on their recent results is spurred on by our fear and greed. It may lead to buying high and selling low - just the opposite of the adage to buy low and sell high. All our back and forth and up and down can potentially lead to lower returns. A recent Morningstar study revealed that over the past decade, the 10-year average fund investor return is 1.68%, compared with a 10-year average total fund return of 3.18%.
So how do we get a grip on our emotions and take them out of our investing decisions? Here are some suggestions to consider:
Remember, history tells us that it's time in the market, not timing the market that helps us reach our goals.Sources:
"Can You Outsmart the Market," Pat Regnier, Money Magazine, January/February 2010, pgs. 86-91.
Morningstar, www.morningstar.com, "Bad Timing Eats Away at Investor Returns," Russel Kinnel, February 15, 2010.
Your Money & Your Brain, Jason Zweig