By
Borsgade
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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