Emotion and Investing
While some might think that investing is purely a rational exercise, that certainly does not seem to be the case for many investors. Emotion and sentiment drive market movement/volatility and understanding this reality is a key component for investing success.
Behavioral finance theory suggests that fear and greed can lead to unanticipated consequences when heavily influencing investment decisions. Short-term momentum investors rely on emotion to drive profitability. Longer-term or fundamental investors rely on cash flow predictions and are less impacted by short-term emotions. In our view, long term wins.
If you'd like to learn more about behavioral investing theory, here's an interesting link:
At Destination Wealth Management, we recognize the impact sentiment can have on investment strategies and do our best to capitalize on over-reactions or defend against under-reactions. As portfolio managers, we question constantly if our decisions are driven by rational likely outcomes compared to irrational conjecture. In fact, we often hear from those we work with a key benefit of working with DWM is to avoid being overly influenced by emotion.
In today’s video I talk about:
- How do emotions affect investment strategy?
- Are there cycles of grief and fear?
- How does media language contribute to emotional reactions?
- 2 Goals: Minimizing negative emotion impact. Maximizing investment opportunity.
- Emotions: A quick summary
- Here to help
Spanish Flu 1918 vs. 2020 COVID Pandemic
Our Common Sense update later this week will be a comparison between economic reactions during the 1918 Spanish Flu epidemic and COVID-19. You'll find interesting I'm sure.