per year. 2 “People believe they are better than everyone else, in spite of the evidence that most people fail to beat the market,” Thaler notes. Studies also show that more confident investors tend to conduct more trades, 3 even though, as Thaler notes, “Lots of trading tends to kill performance.” KEEPING EMOTIONS IN CHECK Human behavior will always be influenced by our emotions; that’s just how we’re wired. But even if we can’t override our emotions, we can learn to manage them – and limit the extent to which they influence our
Investors tend to overrate their own abilities and react too strongly to market events.
financial decisions. One way to avoid the impact of emotions on the decision-making process is to set up rules ahead of time that will direct your investment decisions. For example, you might set up a plan to sell a portion of your company stock holdings once they reach a certain threshold or percentage of your portfolio. This type of strategy can help remove emotion from your decisions on when to sell, and it can help avoid holding concentrated positions in your portfolio.
Working with a financial advisor can also help you limit the influence of your emotions on your financial decisions. For instance, an advisor can help you better gauge the level of risk you can tolerate while also helping you understand how much risk is needed to help you reach your long-term goal. By developing a long-term investment and asset allocation strategy you can help maximize your financial flexibility while giving yourself a plan you can focus on regardless of the current circumstances. With a focus on your goals and a solid, long-term plan in place, you’ll have something to reference that will help you avoid overreacting when the stock market undergoes a correction.
Keeping a focus on long-term goals can help reduce emotions’ negative impact on investing.
When you do have an emotional response to market news, acknowledge that response and understand that it’s perfectly natural. But you get to decide whether you let that emotion dictate your actions. Remind yourself that you have a long-term plan and that momentary blips in the markets were factored into that plan. Better yet, unplug from the market news altogether. The smartest approach is not to think about it too much,” Thaler says. “Your focus should be on the long term.” 1 Dalbar 2013 Quantitative Analysis of Investor Behavior. (http://qaib.com/public/downloadfile.aspx?filePath=freelook&fileName=advisoreditionfreelook.pdf) 2 Glaser & Weber. 2007. Why Inexperienced Investors Do Not Learn. Finance Research Letters . (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1002092) 3 Trinugroho & Sembel. 2011. Overconfident and Excessive Trading Behavior: An Experimental Study. International Journal of Business and Management. (www.ccsenet.org/journal/index.php/ijbm/article/view/8801)
If you’re worried about how your emotions are influencing your decision-making process, contact Commerce Trust to be put in touch with an advisor who can talk further with you. 1-855-295-7821 | commercetrustcompany.com
Wealth | Investments | Planning Commerce Trust Company
Commerce Trust Company is a division of Commerce Bank. PC1324
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Made with FlippingBook Annual report