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Michael Mauboussin: How stress affects your investment decisions

In an interview with Morgan Stanley, Michael Mauboussin talks about a number of ways to remove emotions from investment decisions. He explains how stress affects decision-making, both in biology and finance.

Just as an animal on the savannah responds to danger with a short-term focus on survival, stressed investors tend to prioritize immediate concerns over long-term goals. This can lead to missed opportunities during falls in the stock market, where buying at low prices holds the greatest potential for future gains.

So, while there may be fabulous investment opportunities beyond the horizon, stress can prevent you from being able to look out that far.

Think about a market crash when prices are low. Intellectually, this is the ideal time to buy assets because they’re so cheap. But the stress of the market’s crash and its impact on your portfolio can instead lead you to avoid doing anything or, worse, sell at the wrong time.

This is where a trusted advisor can be incredibly helpful. They can keep their eye trained on the long-term horizon, knowing your ultimate financial goals. This can help keep you on track and avoid making short-term decisions that may be detrimental to your long-term returns. Because ultimately, achieving the results you seek is just as often about reducing errors as it is about picking winners.

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Disclaimer of liability

The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

Readers are advised that investing may involve a risk of loss that cannot be determined in advance, and that past performance and price development cannot be used as a reliable indicator of future performance and price development. For further information please contact info@borsgade.dk

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