There was an excellent program on Nightly Business News on Good Friday. Because the market was closed, they did a special on current investment theory.
They said most investors make a mistake in thinking of having multiple portfolios because of various financial objectives (college education, home down payment, retirement, etc.). They likened this to someone who gets tips or a bonus and takes more risks with it. I have seen gamblers talk about being "ahead" when they have won at the last casino they played at, and they have a wad of money more than they last gambled, even though their overall cash position is down from when they arrived in Reno. NBN said people should think about having one overall portfolio that needs to serve various purposes. One can set up a Yahoo portfolio that includes all investments.
They said most failings of investment are psychological, and that the way to beat the market is to invest without emotion and not trade much. One fellow explained the psychological habit of "anchoring." That is we estimate values of unknown things from value of known things, and never make a full adjustment. Thus when we estimate prospective earnings we will always estimate them closer to historical earnings than we should (either up or down), and this would go for share price too I suppose.
It's a tough game to play.
BTW, Paul, thanks for your answer to my questions. |
