Even if you just buy company stock or mutual funds in your 401(k), you are still considered an investor, and this blog is for you.
In our last blog, we talked about the “feeling” brain and the “thinking” brain. We run on our Feeling brain most of the day until we kick in our Thinking brain for analytical decision making. Quite often, we pick stocks and mutual funds based on our Feeling brain, without even knowing it. Here’s how.
Buy High and Sell Low – Never?
Logically, we would all agree that Buying High and Selling Low is a good way to lose money quickly. And yet we do it. Very reputable companies feature the Top 10 Mutual Funds, or something similar, every year based on their proprietary judgment. And then many of us run to buy them. But should we?
Our Feeling brain sees the Top 10 – which means "the best" in our culture. Our Feeling brain also reacts to the return published – it might be 80% growth in a year versus the 1% we’re getting on savings accounts or the 10% in other mutual funds. Wow. This makes us want to buy these investments. But wait – it’s not that clear.
Use Your Thinking Brain to Ask These Questions
The Top 10 usually refers to the great return in one year – what about the other 5, 10, or 15 years of the fund? Has the fund always done well, or is this a one-time event? The same goes with the 80% return. We cannot assume it will occur next year. If you follow the herd and invest in one of the Top 10 when they’re highlighted, you may be buying high. The big return has already been realized and there is no guarantee it will stay there, or continue to perform. The price of the fund or stock may fall, and you’re stuck with a loss. Think before you leap and protect your hard earned money.
Carrie Rattle is a Principal at BehavioralCents.com, a web site for women focused on the mind and money behaviors. She has worked in the financial services industry for 20+ years and hopes to inspire women to better prepare themselves for financial independence. Thoughts always welcome: firstname.lastname@example.org.