MetLife Retirement SavingsLink

The SmartMoney article below is provided for information purposes only and is not designed or intended as investment advice; nor as a basis or determination for making any investment decision for any security. Remember that past performance which may be referred to in the commentary is not a guarantee or prediction of future performance. Empower Retirements^™ is not responsible for the content contained in this SmartMoney article or contents of links to other articles. All general information is provided as a service of SmartMoney and does not necessarily reflect the opinions or beliefs of Empower Retirement^™.

The appearance of SmartMoney articles within this site is provided as a benefit to the users of the site and does not constitute an endorsement of this service by SmartMoney.

Posted with permission of SmartMoney, a joint publishing venture of Dow Jones & Company, Inc. and Hearst Communications, Inc. © 2005 SmartMoney. All rights reserved. This article may not be re-published or copied without the permission of SmartMoney.

No-brainer behavior

Investment decisions based on emotion rather than reason can result in costly mistakes. Behavioral economists study the choices investors make and have identified a number of causes of irrational decisions:

Anchoring. We tend to use our initial experience as a guide to the future. For example, people think of whatever they paid for an investment as its “real” worth, “anchoring” the investment to its purchase price rather than to its fundamental value.
Loss aversion. Some investors dislike acknowledging a loss so much that they hold a poorly performing investment for years, hoping to “break even,” instead of selling it to reinvest in something more promising.
Herd mentality. If your investment choices are based on what everyone else is doing, you overpay in bull markets and miss out on bargains in bear markets.
Framing. Investors respond to identical facts differently, depending on how they’re presented, or “framed.” An investment described as having a 50% chance of failure, for example, is seen as riskier than one described as having a 50% chance of success.
Overconfidence. We often attribute good returns to our own abilities. In a bull market this can make us opt for high-risk investments instead of a diversified portfolio.

Have a plan
Take emotions out of investing decisions by creating an asset allocation plan that fits your needs and sticking with it. Rebalance periodically to restore your desired mix. Keep in mind that asset allocation can help you achieve diversification in your retirement plan, but it doesn’t ensure a profit or protect against a loss during volatile markets

Stay on course by investing steadily, whether the market's up or down. Your money will automatically buy more shares when prices are low, and fewer shares when prices are high. This process, called dollar cost averaging, doesn't assure a profit or protect against losses in declining markets. You should be prepared to continue the program of investing at regular intervals and consider your financial ability to continue purchasing through periods of lower price levels in order to maximize the benefits of dollar cost averaging.

Finally, don’t forget the big picture: Consider how your entire portfolio is doing instead of focusing only on an asset that’s currently underperforming.

Back