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5 financial traps hurting your portfolio (and one secret weapon to fix them)

June 12th, 2015 by

Jessica Alba credits two assets for her success - and they will be your secret to successful portfolio management


According to an interview in Shape, Jessica Alba credits her success to two assets: common sense and intuition. And interestingly - neither are really all that common.

There's no doubt intuition is an asset, with research showing it to be one of the top predictors of success. The challenge is in knowing when it's your intuition speaking... and when it's just that attention-seeking emotional left brain of yours. 

Emotion, emotional intelligence - tomato, tah-mah-toe, right? Not exactly. Where many experts argue intuition - or emotional intelligence - is a result of your brain picking up on cues your consciousness has yet to process, emotions are just your left brain sending louder signals than its right, more logical counterpart (they don't call it the right brain for nothing).  Big deal - so what?  Well, in fact...

More than a feeling

The cost of confusing the two can be dear: A Forbes article that looked at a number of sets of portfolio performance data over the last 15 years estimated the cost of making investment decisions based on emotions amounted to an average of 100 basis points per year. Compare that against research that shows emotional intelligence trumps IQ by a ratio of two-to-one in terms of determining a person's level of performance - as an article in See It Market points out -  and you can begin to see a stark contrast between the two.

Big deal, indeed. Feel like crying yet? Hold the waterworks for now. Saving your finances from, well, yourself can be as straightforward as acknowledging the most common emotional threats you may be indiscretely posing against your own portfolio. Put away the tissue box and let's take a look.

Here are five surprising emotional tricks your left brain may try to play on you - and your portfolio.

5 emotional traps your mind is playing on you

  • Endowment Bias

Generally speaking, humans are loyal creatures. We are loyal to friends, jobs - even brands. But we're also loyal to our investments - even in a losing scenario. This can end up costing us big money in the long run. Ah, the things we do for love...

  • Break Even Effect

The need to make up for lost profits (presumably incurred from that aforementioned endowment bias) can often spur investors to jump at the first opportunity to fill that void. Kind of like breaking up with a significant other and looking for a quick rebound - this often sounds better than the reality proves to be.

  • Gamblers Fallacy

This cognitive mind game convinces some people that, if a certain result continues to occur, the opposite is bound to come up sooner or later. They might be right sometimes - but we assure you: It's only by coincidence. For instance, if you roll a die five times and come up with five out of six numbers at least once, you might think the sixth roll will produce the sixth number. But in fact, each roll of the die has the exact same odds and chances placed on it - regardless of how many times you've rolled it. Say no to this emotional mindset - no investor wants to take such a chance on their finances

  • Disbursement Effect 

This effect occurs when investors sell soaring stocks too soon (those pessimists) and hold onto losing stocks for too long (those optimists?) in the hope they'll soon rise. Not everything ends in a happily ever after. Our advice: hold the winners and kick the losers to the curb. It's so much more simple than you're making it, dear. 

  • FOMO effect

Fear of missing out on a gain can occur in investors who join the momentum train, only to be left behind in the dust. They see other investors making bank on a particular stock and try to play catch-up. Sound familiar? Reminiscent, perhaps?  Like, say, of every Saturday night in your 20s? Every stock is sensitive to overall economic health in some way, big or small - and can turn in any direction at any time. Don't give into the illogical fear that you will definitely miss out unless you invest now - because rash decision-making is not the successful investor's friend.

Call it investor's intuition

On the flip side, if you can learn to tune your intuition, train yourself to hear it loud and clear - even over those obnoxious emotions of yours - you may find yourself feeling a little richer each day. 

That's a feeling we'd all like to bank on.

Jun 26 2017 12:17am

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