Psychology and Investing

In my opinion, the number one enemy of a long term investor (or short term for that matter) is a number of psychological factors that inhibit our ability to make rationale and correct decisions when it comes to our investments. One of the books I am reading, Predicting the Markets of Tomorrow by James P. O’Shaugnnessy has a good chapter on behavioral economics.

Without getting into all the details found within the chapter, he highlights 4 key psychological pitfalls that greatly inhibit an investor’s ability to be successful in the markets. They are:

1. Shortsightedness – our over reliance on short-term data
2. Overconfidence – the tendency to rank our own abilities too highly
3. Hindsight bias – believing that we know an outcome before it occurs
4. Representativeness – seeing things the way we think they “ought” to be

In order to overcome these psychological pitfalls, an investor needs to have a well planned and rigid investment plan and philosophy. Ensuring that your focus is carrying out your plan as opposed to constantly reacting is the key. That is not to say you cannot change your plan, just ensure you are doing it for all the right reasons, and not just because you “feel” like it.

• Weekly Dividend Investing Roundup – September 6, 2008
• All Dividend Stocks Have Their Limitations – Do You Know What They Are?
• Dividend Investing eBook – How To build a Never Ending Cash Distributor
• 6 Stock Trading Tips for Long Term Investors
• What You Need To Know About ETF Investing