STREET DOGS
WE ARE hard-wired to rely on established patterns. In the stock markets, that can cost you.
You’re smart, confident, and always on top of the latest investment news. If something’s hot, you’re buying. If something’s not, you dump it.
In 1998 you bought into the listing boom. In 2007 you bought derivatives. In 2011 you bought gold. In each case, buying what was “going through the roof” and afterwards selling after it fell. You can’t resist buying yesterday’s winners, and it’s cost you plenty.
This behaviour is pretty common. Too many investors, unfortunately, look backward, putting their money on yesterday’s front-runners. It’s a recipe for disaster. We’re attracted to hot currencies, sizzling commodities and sky-rocketing stocks. The amygdala in the brain comforts us when we’re buying yesterday’s winners. It has us looking for established patterns because they served our ancestors well. So, we’re hard-wired to add to funds that are winning, and dump funds that aren’t performing. We expect winning funds to keep winning and losing funds to keep losing. Fear of low prices prevents us from buying when prices are low, and elation at the gains has us trying to buy more when prices are higher.
However, if you’re adding to your investments each month, you’re probably better off not adding to what is rising in price, and instead adding to bonds when stocks rise, and adding to stocks when bonds rise. Invariably, someone you know is going to make a killing by picking yesterday’s winner — but investing is a marathon, not a sprint. Look at last year’s winners if you must. Just don’t buy anything based solely on past performance. Adapted from Your Own Worst Investing Mistakes by Andrew Hallam
Michel Pireu — e-mail: pireum@streetdogs.co.za