Wednesday, January 12, 2011
Are DIY Investors Doomed by Their Reptilian Brain
The enemy of the DIY investor is emotion. The natural human response to rising markets is that fell good emotion of putting all the poker chips into game in the misguided belief that markets only go up; in falling markets, peoples' instincts are to take their money out of the market to preserve their cash-- precisely the wrong reaction in both cases. CNBC and Fox Business scream buy, sell, buy, sell all day long to anyone who tunes in. A parade of experts are trotted out to get the emotions churned up. After all, TV is about sensationalism.
What's a DIY investor to do? Turn off the stimulus. Don't watch the business news channels except on rare occasions. Don't check investment prices everyday. But do develop a long-term investment plan based on a diversified asset allocation strategy. Do practice dollar cost averaging religiously. Do plan on investing for 30-40 years. Turn off all that stimulation to reptilian brain that can cause you to do dumb things like move to cash at market lows. I can't tell you how many people I knew that did that in 2008-2009, which was the buying opportunity of a generation. They missed a gigantic upside move in prices like they will probably never see again all because their reptilian brain kicked into fear mode and their instinct for self-preservation took hold. As John Bogle and the White Rabbit in Alice in Wonderland say: "Don't just do something, stand there." For long-term investors, that is the wisest advice of all.