Could You Be Your Own Worst Enemy?

This blog is from the September issue of Portfolio Perspectives.
 
“The investor’s chief problem — and even his worst enemy — is likely to be himself.”
 
— Benjamin Graham, The Intelligent Investor, 1949
 
The U.S. stock market (measured by the S&P 500) was down more than 5% two days following the historic Brexit vote. Investors sold out of stocks as it seemed the market was on course for a global market correction. Yet, only five trading days later the market was near its pre-Brexit level. I believe the panic was unwarranted and investors succumbed to their emotions yet again.
 
Why do so many investors make investment decisions based upon emotional reactions to short-term events? One possible answer: Because we’re human. It’s normal to feel anxiety during economic downturns or market turmoil — like Brexit — but acting upon those anxieties can lead to imprudent investment decisions. The key is not letting your emotions get in the way of your long-term investment plans.

Why Nobody Wants to be Wrong

Why do so many investors make decisions based upon emotional reactions to short-term events? Because we’re human. Greek debt troubles, Chinese stock market declines…it’s normal to feel anxiety during economic downturns or market turmoil, but acting upon those anxieties can lead to poor investment decisions. The key is finding the balance between emotion and reason.