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Date: June 11, 2018
Category: Alternative Investments

The Emotional vs. Rational Investor

It’s natural to let your emotions dictate some day-to-day decisions, but have you considered how emotions may hinder your long-term investment goals?

Have you ever made investment decisions based on your personal values, past memories, or what you hear on the news? Are you impacted by trends or how EVERYONE else is investing? If the answer is “yes” to any of these questions, you may be letting your emotions make important investment decision.

Are you getting in your own way?

Being an emotional investor is like riding a rollercoaster that rises and falls with each market movement. You typically panic and tend to sell on the way down, and then buy back in at a higher price on the way up, only to demand a fire-sale when it turns south again.

A recent DALBAR study shows how this type of reactive investing can impact long-term growth. Over a 20 year period period, the average emotional equities investor lost $162,062 compared to the S&P 500 Index, and the average emotional fixed-income investor lost $150,767 compared to the Barclays U.S. Aggregate Index.1

As an emotional investor, your tendencies to buy high and sell low are negatively impacting your investment growth potential. Rather than staying the course with long-term goals in mind, you have a greater desire to avoid the risk of uncertain loss.

Fighting back

Combat emotional investing by implementing strategies that help you make more rational investment decisions.

The Lesson Here:

Rational investors win long-term. It’s important to understand that you can’t predict or time the market. However, you can think in a strategic, rational way and work with your financial advisor to avoid rash, emotional decisions.

1 DALBAR. 24th Annual Quantitative Analysis of Investor Behavior. 12/31/17.

2 The Wall Street Journal. How Your Emotions Get in the Way of Smart Investing. 6/14/15.

3 Seeking Alpha. What 2016 Can Teach Us About Risk Tolerance. 11/18/16.

4 The Wall Street Journal. The Emotions of Investing and More. The Experts Weigh in – At a Glance. 8/25/16.

This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security.

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