ALAN S. MOORE

Investment – all in the mind Have you ever thought about the psychology behind making investment decisions? Researchers in the field of behavioral finance are looking at how certain psychological traits may lead to errors of perception and judgment that affect investment results. These traits influence your investment decisions, creating your investment style. Read the following hypothetical investor profiles. Do any of them sound familiar?

The Fearful Investor

Fear of making a decision she’ll later regret makes The Fearful Investor either procrastinate or act in haste. She might delay selling a declining stock, for example, and lose a significant portion of her original investment. Or she may be afraid that a winning stock will suddenly tank and sell the investment prematurely. The Fearful Investor should try not to let the possibility that she’ll regret a decision carry too much weight in her investment strategy. Sticking to a long-term investment plan with a trusted financial advisor will help remove some of the trepidation associated with investing for The Fearful Investor.

The Permanent Investor

The Permanent Investor assumes that two stocks are alike simply because they share some of the same qualities – an assumption that sometimes affects. The Permanent Investor’s investment decisions. He also hesitates to reclassify stocks that have been branded good or bad, even though their prospects may have changed. The Permanent Investor’s failure to accurately assess an investment because he doesn’t consider all relevant information leads to losses and missed buying opportunities. He should remember that today’s loser may be tomorrow’s winner – and vice versa.

The Confident

You hear it all the time: Have confidence in yourself. While that may be good advice, The Confident Investor constantly overestimates his abilities and the accuracy of the information he receives, and this often spells disaster for his investment returns. Studies have shown that overconfidence like his sometimes causes investors to trade securities more frequently. The potential consequence? Lower investment returns. A possible solution: Trade less, particularly in taxable accounts. Frequent trading is usually not a characteristic of a solid, long-term investment plan. Being confident in your plan is a good characteristic, but only if the plan has been well researched and is executed carefully.

The Bargainhunter

The Bargainhunter latches onto a few anchors – a stock’s recent price or performance, for example – as evidence of an investment’s value. The result: He often buys a stock merely because its price has fallen and it seems cheap relative to its former cost. Before The Bargainhunter invests, he should investigate the reasons for the price decline and evaluate the stock to determine if it’s really worth owning. The important question is not what the price of the stock was a year ago, but where it is going and whether it fits into your plan.

The Steadfast Investor

The desire to avoid believing two conflicting things at once keeps The Steadfast Investor from rationally evaluating her investment decisions. She often ignores or discounts new information if it casts doubt on her investment choices. The Steadfast Investor should write down her reasons for purchasing an investment and review them periodically, or set time limits for her investments to perform as expected. While this approach may not work with all investments – value stocks, for instance – she may find it a helpful strategy to follow for others. While it is important to stick to your investment strategy, it is always important to review your goals to make sure that your strategy will get you where you want to go.

The Shortsighted Investor

The Shortsighted Investor forgets that long-term returns are what count when she’s saving for retirement – or for any goal that’s far in the future. Failing to allocate enough money to equities because of the possibility for short-term losses seriously affects her retirement account growth. The Shortsighted Investor should base her asset allocation decisions on the potential for higher returns over several years, and not just on how the markets are performing today. Asset allocation and long-term planning are both important keys to a successful investment plan. Creating a long-term plan can make investing more comfortable for all types of investors. Contact a professional financial advisor to help you create and maintain an investment plan that is right for you. ALAN S. MOORE is a Financial Advisor of Legg Mason Wood Walker, Inc., a diversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc.