November 26, 2014
There are many ways to be irrational with your money. Being and acting rational with your money is extremely important. There are 4 common mistakes that you do not want to make with your money. Have you ever noticed one of these 4 things happening to you or those you know?
1. Anchoring – This is when you become fixated on one piece of data, even though it’s out of date. “If I paid $80 for stock that’s now under $70, I won’t sell it until it gets back to $80 because that’s my anchor.” Says Frank Murtha, co-founder of consulting firm MarketPsych. What you can do: Present the change as an opportunity to move into a potentially lucrative new investment.
2. Endowment Effect – Placing more value on things you own simply because you own them and you’ve become emotionally attached to them.
What you can do: Take an assessment of your situation and learn what you could potentially lose by sticking with your current situation and what you could gain by agreeing to sell or making a change.
3. Overconfidence – The belief that you can outperform the market consistently.
What you can do: Use the “Ulysses strategy.” This term refers to the plan Ulysses used to be able to hear the Sirens’ song without flinging himself into the sea – having his crew tie him to the mast. With overconfident investors, it means committing to a balanced strategy, with contingencies for specific conditions.
4. Disposition Effect – Selling profitable holdings too early and unprofitable ones too late.
What you can do: Try the Ulysses strategy or enlist the help of a Financial Advisor to separate your emotions from your finances. You want to make decisions on facts not just emotions.
Stock investing involves risk including loss of principal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.