Don’t React, Stay Calm

Understanding behavioral influence on investing

The behavioral instinct of humans to “do something” in reaction to extreme events, or the constant barrage of the media is a survival mechanism that tends to work against us in the investment sphere. Studies have shown that the more often one changes one’s portfolio, or, for that matter, even looks at it, the lower will be the return.

When investors shift their focus away from their long-term objectives to short-term performance, the results are almost always negative. This can best be illustrated when investors, en masse, bail out of a declining stock market with the intention of getting back in when it turns around – a feat very few investors can actually achieve, leading Warren Buffet to quip, “The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient.”