Just as fear can drive equity values in a bear market, greed plays a role when a rising stock market defies all laws of gravity. Emotional investing being driven by the investment community’s greed was responsible for the incredible run and subsequent bubble in the stock market during the late nineties. While greed in the aggregate that is driven by society in general can cause major financial bubbles worldwide, our own personal greed can wreak havoc in our own investment accounts. Take Andrea, for example, a young advertising professional that is a do-it-yourselfer when it comes to investing for her future.
Andrea is of the opinion that a globally diversified, well balanced portfolio is about as exciting as watching paint dry. She was a finance minor in college, reads financial websites on a regular basis and knows more of what’s happening in global financial markets than the average person. Her investment strategy is to identify two or three market segments that she wants to be invested in and then analyze the particular stocks within those segments in an attempt to determine which ones will bring the highest returns.
Andrea is more successful than most do-it-yourself active investors and is actually right about 50% of the time when picking the stocks she will purchase. Unfortunately, she fails to recognize the importance of having a sell discipline and routinely holds on to stocks for too long. Letting greed drive her investment decisions significantly hurts Andrea’s long-term performance. Setting a profit goal and selling after your investment reaches such a goal, is easier said than done, to be sure. Instead of taking profits when her decisions pan-out, Andrea tends to allow her greed to nudge her toward taking even larger positions in the stocks that have risen in value at the greatest rate. Emotional investors driven by greed and falling into such a trap will often receive the painful reminder that what goes up the fastest will often come down the fastest, as well.
We all have a little greed tucked away deep within. If we can look past the emotion of greed, and invest on an objective, non emotional basis, we will be better positioned to achieve our long-term financial goals.
By following this simple guide and keeping your emotions out of your investment decisions, you will be better off than the majority of the investing public.
This article is for educational purposes only and is not a personal recomendation of any strategy or product. You should not make any changes to your financial situation based only on this article. It is advised that you consult a qualified advisor and tax professional to evaluate your situation before making any changes to your finances.