Step 1: Active Investors
Problems Emotions-Based Investing Obsessively playing the stock market is recognized by Gamblers Anonymous as a form of gambling addiction. San Francisco clinical psychologist Paul Good developed a set of warning signs that may reveal whether an active investor is actually a compulsive gambler in disguise. Among them are a preoccupation with the financial media, borrowing to speculate (leverage), inability to cease or control trading activity, and throwing good money after bad in order to break even8. As the head of the Gambling Disorders Clinic at Columbia University, Dr. Carlos Blanco has a lot of experience with gambling addicts, and he says one difference between obsessive active investors and chronic gamblers is the age in which the disease is most prevalent. Pathological gamblers are typically in their late teens and early 20’s while people who are addicted to speculating in the stock market are commonly in their 30’s and 40’s. Behavioral finance is a field that studies the connection between investors’ emotions and their financial decisions. In The Little Book of Behavioral Investing: How Not to be Your Own Worst Enemy,9 author James Montier talks about the importance of planning ahead to protect us from the “behavioral biases that drag down investment returns.” He highlights the need for investors to pre-commit to an investment strategy in order to avoid the pitfalls of emotional decisions. In Your Money & Your Brain,10 financial writer Jason Zweig
Published on Jun 1, 2015
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...