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The enemy within
By Robin Bowerman
Smart Investing
16th October 2007

Principal & Head of Retail, Vanguard Investments Australia

By this, he means that investors' emotions can be significant barriers to their investment success.

"From the numerous studies available, professional investors know that behavioural biases have a significant impact on investment performance," Abey writes.

Indeed, some investment firms in the United States have developed investment strategies to take advantage of the emotional reactions of personal investors. "These firms have observed that, collectively, individuals over or under-react to new information, causing market prices to temporarily move away from fair value," he says.

Abey believes there are simple strategies that investors can adopt to help overcome their emotional instincts.

"Dollar-cost averaging, which involves investing pre-determined amounts in the markets at pre-determined dates, takes the emotion out of investment decisions," says Abey. "Regular savings plans do the same."

Abey suggests various other ways for investors to keep their emotional impulses in check including: avoid rushing to investment judgements based on insufficient information of questionable quality, do not expect investments that have performed well in the recent past to necessarily perform well in the future, and do not over or under-react to world events.

"Investors can be driven to distraction by placing too much weight on new and seemingly important information while more powerful long-term trends are ignored," he says.

"This creates an excellent opportunity for other investors who are able to focus on longer-term expectations."

Rushed, poorly considered decisions in our everyday lives are often quickly regretted - the same applies to investment decisions.

 

 

 



19th-October-2007

        
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