Overcoming Bad Behavior In spite of every investor’s good intentions, some behavioral tendencies can stand in the way of sound financial decision making. For example, scientists have identified cognitive biases that may cause people to ignore critical facts and/or focus on information that may not be important. And clearly, normal emotions can drive hasty decisions that could harm the long-term performance of your portfolio. Chasing performance. It’s easy to see why investors may be tempted to move a lot of money into the asset classes or individual investments with the highest recent returns. The problem with this approach is that past performance does not guarantee future results, so today’s “hot pick” could turn into a loser when conditions shift. Panic selling. When investors pull out of investments because they are afraid, as opposed to evaluating fundamentals, they often end up selling at the worst possible time and buying again at higher prices after the markets recover. Acting on news. By the time the average investor learns about economic developments or other events that could affect individual investments and the financial markets, it is usually too late to respond effectively — it’s very likely that the news is already reflected in the prices. Ignoring inflation. Investors should be aware of the potential risk of inflation, because even modest price increases compounded over time can erode the purchasing power of the assets in their portfolios.
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