In the second case, you might as well view the situation as a glass half full and recognize that today's rock bottom values offer the reverse of yesterday's high values that lead to such dismal results. We will take more risk to avoid a sure loss than we would to lock in a sure gain. If we start thinking about how much we want to avoid any future losses, we will take some risks. Therefore, if we keep depositing money regularly, we are steadily reducing the average price we have paid for all of our shares combined. The result will be a glass that fills that much sooner.
This most readable book on the subject of how the mind makes financial decisions is one entitled, "Why Smart People Make Big Money Mistakes" by Gary Belsky and Thomas Gilovich. Those of us with mutual funds or credit cards owe it to ourselves to understand how money can mess with our heads. To the extent that financial advisors create value, it is because they offer a sounding board for filtering our behavioral economic urges. This contribution is difficult to measure, and our temptation is to just look at simple cause and effect results of investment advice. The paradox is that specific investment advice, like what stocks and mutual funds to buy, may have little to do with long-term financial success. In the end, advisors who double as therapists may contribute the most to our financial success.
Copyright © 1999 – 2012 Freedom Investments. All Rights Reserved. Freedom Investments, Inc. Member FINRA/SIPC Privacy & Security
