Category: Investment

What precisely is your personal investment theory and method? Do you know how a personal investment theory can help you? Whether or not you recognize it, you actually do have a theory or method relating to investment as well as money management. The choices you are making are driven by your main theory or approach, even though you never have discovered it.

Knowing your personal investment theory is essential so you can know how to come up with the most suitable decisions for your own. What you need from ones own investments will be different than what someone else will need, therefore you should come up with judgments that will work in harmony along with ones own pursuits. Your theory will push those choices.

Let us take a look at the best way to get to a personal investment theory and how to use it to assist you to create the best money choices overall.

Pursuits

Just what are your objectives when it comes to your investing? Your personal investment theory can help you accomplish those targets and must have these goals into consideration. Ones own first reaction could be that you want to get wealthy through investing, although this may not be sensible and not even accurate, if you give it some thought.

While just about everybody wants their money to grow, they also want to save money for retirement, for university, or even for a rainy day. In addition, they should save a specific amount at set times, like owning a specific in their pension savings when they reach a certain age. All of these objectives are linked into an individual’s personal investment theory.

Do you know your own investment goals? It’s good to sit down and write them out completely; you want to save, but how much? And, for how long? If you do not know your objectives then your own personal investment theory will be worthless and ones own investment techniques will not help you to attain those objectives.

It’s very good to think about your personal investment theory and ask yourself if you could benefit from some variety in your investment. Many consider investing as a way to simply raise their own cash, which is perhaps one aspect of purchasing stocks and other such options.

However, most investing that brings high rewards also means greater risk. Lower yields also mean lower risk, and these lower risks are useful for long-term benefits targets. ones own personal investment theory should include putting some funds away in places where it’s much safer, even if it means fewer returns.

Nobody can tell you what exactly ones own personal investment theory should be, however it’s good to think about how it affects ones own choices when it comes to your investment dollars. Becoming too careless can mean losing those dollars, but not taking any kind of risk may mean missing prospective returns. Knowing ones own personal investment theory and targets can help you make effective, balanced judgments regarding your own financial situation.

Normal human emotions may overtake the rational part of the brain, and cause investors to make poor investment decisions. Some behaviorists theorize that modern humans are not hard-wired to be good investors. What can investors do to neutralize the effects of emotion and make smarter investment decisions?

Recent times have been difficult for investors. Some have made the situation worse by buying and selling at the wrong times. For most people, the normal emotional response to rising markets is to feel confident and positive. This can lead to the desire to increase risk tolerance and purchase risky assets at potentially high prices. The opposite is true after big market declines. Our emotions may tell us to pull in and avoid risk when, perhaps, the opportunities for higher returns are greatest.

Because of this and other reasons, individual investors are notoriously bad market timers, as evidenced by mutual fund cash flows. For example, The Wall Street Journal recently reported that mutual fund research firm, Morningstar, determined that investors contributed more than $300 billion of new money to equity mutual funds during the six-year period from 2002 to 2007, much of it near market highs. When prices declined, investors redeemed more than $150 billion. According to the Hulbert Financial Digest, the total cost of this poor timing for stock fund investors was more than $42 billion for the 12 months ending May 31, 2009.

As a possible explanation of this behavior, we might consider the interesting work that is being done if the field of neuroscience, where researchers study the brain’s response to stimuli in an attempt to better understand human decision-making. Results are scientifically confirming what behavioral finance economists have suggested for some time: people are not hard-wired to be good investors because their emotions and other “normal” reactions can overtake their ability to reason rationally and make smart decisions under certain circumstances.

Brain scans show that there are two parts of the human brain operating in radically different ways. The prefrontal cortex is the rational, unemotional part of the brain that is used in long-term, logical thinking. The limbic system, on the other hand, is the brain’s short-term, emotional side that often causes trouble for investors. Under certain conditions, our emotional brains can take over and cause us to make poor, irrational decisions.

In a study published in 2005, researchers from Carnegie Mellon, the Stanford, and the University of Iowa, found that people with an impaired ability to experience emotions made better investment decisions in a simple investment game. The game involved a series of rounds in which players could choose whether or not to invest hypothetical money. Each round was structured to have a positive expected return on investment so that a rational player should choose to invest in every round, regardless of what happened in previous ones. Not surprisingly, the normal, unimpaired players were frequently affected by recent outcomes and were reluctant to invest after a series of losses. The players with impaired emotional function invested more regularly and performed better because they were less affected by fear and were more willing to take risk.