Summary
"It's one set of emotions when their portfolio drops 40 per cent in value, and they own it," Bieber says. "And it's a completely different set of emotions when their portfolio falls 40 per cent in value and they owe money on it."
Stock-market declines are part of the natural cycle of finance economics. It might be hard to stomach losses, but historically, the market does recover those losses, and more. "The average market decline is about 30 per cent in value, lasts about 16 months and happens every five years," says Greg Bieber, investment adviser for Richardson Partners Financial Ltd. "That's going back to World War II, so this is the 13th market decline since then." And it won't be the last.Confirmation bias: We tend to cherry-pick evidence that supports our beliefs. In investing, it's easy to look at a company's high price-earnings ratio -- often associated with future success -- and assume it will continue to do well. In reality, companies with a high ratio tend to produce worse returns the following quarter more than 50 per cent of the time, according to [Meir Statman]'s research. "Confirmation bias shows that what we would like is this kind of clear rule that says, 'Turn right,' or 'Turn left,' but when you have a situation in life involving a lot of randomness, you can find rules that work more often than not, but they are still not a sure thing," he says.See the full content of this document
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Psyched Up
Understanding 'gut feelings' helps you invest better
44With former U.S. Federal Reserve chairman Alan Greenspan calling the current financial woes a "credit tsunami" and many other pundits predicting prolonged economic gloom, it's understandable that many investors feel the urge to get out of the market as they see the value of their investments shrink, seemingly with more ease than they have grown over the last five years.That assumption, however, is wrong...See the full content of this document
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