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Feel-Good Choices May Be Bad |
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June 2, 2008: "Actions that make us feel good are usually a lot less profitable than the ones that make us feel bad or stupid." So says a successful investment manager in a recent Wall Street Journal article, and I couldn't agree more. Human nature is our worst enemy when it comes to creating and preserving wealth.
"Taking losses before they get too big and out of
control implies the admission of a mistake," says hedge fund manager Lorenzo Di Mattia. "You
have to admit that, at best your timing was wrong, or maybe your whole
idea was wrong." The feel-good option is to ignore the market in the belief that the idea will eventually come to good.
One of my first experiences with self-defeating thinking was when my father was laid off from his job as a financial executive after the bank he worked for in Connecticut was taken over by a larger bank. In his early sixties, he was convinced that he would have to work until he was 70 years old so he could pay off the mortgage on the family home. He was going to do it by accelerating his principal payments. Instead, I showed him how, by putting those extra payments into a smart investment and drawing his Social Security, he could retire early. Eight years later, I had done well enough in my business to take him to Scotland for his 70th birthday for a golf vacation.
Had he followed his instincts he would have spent the best of his retirement years chained to a desk. How's your thinking?
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John's Money Mythbuster Blog
August 18, 2008--The most influential economist you never heard of, Nouriel Roubini, was featured in a major New York Times piece yesterday that I urge everyone to read. Roubini, who predicted just about all the elements of our current financial mess, says we're facing the worst recession since the Great Depression. Link.
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July 25, 2008--The Wall Street Journal recently published an excellent article by Jason Zweig on the science of fear and how investors can learn to control the fear response that often leads to bad financial choices. Link.
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