One of my favorite subjects in financial planning is behavioral investing. This is easily the area that causes most investors to under perform or more likely inflict harm on their financial health. And this is not just restricted to the amateur investor but also the professional. In behavioral investing there are 2 extremes that I find most interesting, the under investor and the over investor. Both can be equally damaging.
The under investor is the one who closely watches the market year after year but never actually participates in the market for reasons of fear. If the market is going down this month than they are glad they are not in the market. If the market is hitting one new high after the other then it is not the best time to go in. That's one type of under investor. The other type is the one that doesn't even acknowledge the market because they have heard that people loss money in the market.
The over investor is the one that changes their "plan" based on short-term market trends and media talking heads. This investor will chase last years winner and incur excessive trading costs, and taxable events while underperforming the market.
Thursday, July 17, 2008
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