Four Interesting Insights to Ponder

During the financial crisis, investors were in a tizzy not knowing what to do with their investments. Most investors held their positions mostly because they were scared. I remember reading an investor survey undertaken during the latest financial crisis. The survey found that the typical investor lost 35% of his or her market value in the decline, but about a quarter lost almost 50%. Moreover, the survey found that investors experienced varying emotions during this difficult period. The most common emotions reported by most of the respondents were being somewhat furious, apprehensive, and gloomy. More than 50% said it was probably a good buying opportunity, but they couldn’t pull the trigger. Based on this survey, you should realize that being a successful investor requires that you minimize your emotional reaction to the markets and use a systematic, logical, and defensive approach. Otherwise your future results may not be what you expect.

A number of investment advisors are now reporting that more and more of their clients are becoming too aggressive now after the S&P 500 is up more than 56% from its March lows, and want to put their cash to work by buying equities. These investors want to get back to even, and they are not focusing on the risk, but rather on making money.^[2] That’s how investors act at market tops—they can’t wait to get back in. Greed takes over their emotions, causing them to make bad decisions. That is why using the approach delineated in this book will help you make realistic, logical decisions.