Investment Management:
The Emotions of Investing - Part 3 - "The Effects of Greed"
by: Roy Bodinus for the Debt Consolidation Loan
Directory
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.
Investment Management:
The Emotions of Investing
- The Return Chaser
- The Fearful Investor
- The Effects of Greed - (Current Article)
Copyright © 2007 Northwest Advisory Group, Inc.
The views in this article do not necessarily reflect those of the Debt
Consolidation Loan Directory.
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.