How to Be a Better Investor

Step one: Recognize -- and overcome -- the psychological hurdles that influence our behavior.

Remember how you felt that day not long ago when the Dow Jones industrial average plunged more than 500 points over fears that a French bank might sink because of its holdings in U.S. subprime mortgages? Sacré bleu. That rout followed a 400-point surge the day before because investors had concluded that a downgrade of America’s debt rating wasn’t the catastrophe some had feared it might be. News of the downgrade had precipitated a 600-plus-point drop the day before the rally. Clearly, on such seesaw days, the markets aren’t sanely analyzing news developments and incorporating them into share prices. Rather, the markets are emotional barometers.

Yes, we live in trying times, and investors should be concerned about a feeble economy and volatile, often irrational markets. But now more than ever, we need to shunt aside emotions and approach our investments with logic and detachment, and take a long-term view. This is true especially because it’s human nature “to base many of our decisions on how we feel about what’s just happened,” says Daniel Egan, head of behavioral finance for Barclays’ money management unit.

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Bob Frick
Senior Editor, Kiplinger's Personal Finance