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Don't trust your emotions when investing

Do average investors make good decisions about when to buy and sell? In a word: no.

The New York Times reports on research done by Philip Z. Maymin, an assistant professor of finance and risk engineering at the Polytechnic Institute of New York University (whew — how's that for a job title!):

[R]esearch into 17 years of call records at a boutique investment adviser shows that [investors are] likely to buy or sell at the worst possible time.... [NYU's Maymin] studied comprehensive records kept by the investment firm Gerstein Fisher from the firm's founding in 1993 to mid-2010....

The study, which will be published in the spring edition of The Journal of Wealth Management, found that the value of investment advisers was not in the stocks or mutual funds they recommended but in their ability to restrain investors from impulsively trading at the wrong time. It cites data showing that aggressive orders by individuals can cost them about four percentage points a year....

[Interestingly, the study found that most] investors did not trade in expectation of intense volatility or even during it.... They waited until the period of greatest volatility had passed and then looked to do what any adviser would tell them not to do: sell at the bottom or buy at the top....

[T]o too many investors, yesterday matters a lot and threatens to ruin tomorrow.

Although Maymin's research looked at a fairly small number of investors (about 600), the findings are consistent with other studies that have found that average investors, driven by their emotions and instincts, tend to do the wrong thing at the wrong time.

This, of course, is why the Sound Mind Investing approach is based on "mechanical" (i.e., non-emotional) decision making. Buying and selling decisions are made based on performance data, not on the news of the day. Allocation decisions are not made on a whim, but are based on one's season of life and particular risk tolerance.

Emotions certainly aren't a bad thing. They are part of our God-given make up, part of the divine image He has stamped on us. But in the investing arena, emotions tend to war against wisdom.

To experience investing success over the long haul, you must learn to set aside your emotions and follow your plan. Years from now, you'll be glad (an emotion!) you did.

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