A couple of weeks ago, I wrote about how investing in stocks is better done over the long-term and pointed to examples from the S&P 500 Index. I also touched on the importance of understanding your temperament. Today’s article will expand on that.
Making reliable stock market predictions eludes most everyone who has tried it. Evidence strongly suggests not to rely on short-term predictions. It is better to invest in a well-diversified portfolio of stocks over the long-term.
Scientific research out of Princeton University has shown that we have a preference for short-term rewards that comes from the emotional part of our brains. And it wins out over the abstract-reasoning part. For our brain, instant gratification trumps the logic of long-term goals.
In other words, we aren’t hardwired to be good long-term investors. To get around that, we need to be aware of, and manage, the impulses that could lead us to make bad investment decisions. The more we understand about our temperament, the easier it will be to tune out the ongoing, day-to-day market noise and focus on the long-term.
As humans, we can’t turn off our emotions, and investing in the stock market can be an emotional rollercoaster. Success comes with a well thought out strategy and the ability not to over-react when facing the market’s natural volatility. Long-term investors don’t panic and sell when the market fluctuates.
However, just because you invest for the long-term does not mean you won’t be disappointed from time to time. History teaches us that.
Long-term investing increases the chance of success, but all investments have some element of risk.
When investing, it is important to understand your temperament as well as all the factors that work to your advantage.
One of the golden rules about investing is to be in it for the long-term.
Submitted by: Peter Watson. Peter Watson is an agent of, and securities products are provided by, Aligned Capital Partners Inc. (ACPI). ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments.