Must ignore the siren song to enjoy the MelodyRujuta Tamhankar
Joe Wiggins stresses on correct behavioral commitments for long term investors by citing example of Homer’s Odyssey. Ulysses and his crew must navigate their ship past the sirens. The sirens produce a beguiling and irresistible song, which if heard would lead the men to their deaths. Ulysses applies some behavioral science. He instructs his crew to fill their ears with wax to avoid temptation and has himself tied to the mast to avoid action.
Most of us have long-term objectives best facilitated by doing less, yet the constant noise and narratives of markets are there to lure us into frequent injudicious decisions.
Being a long-term, low action investor is the easiest approach to adopt in theory, but the hardest in practice.
How do we make a commitment like Ulysses to protect us from our future investing selves? Plugging our ears means ignoring the chaotic vacillations of markets and the unpredictable path of the economy. Rarely checking our valuations, cutting off our subscriptions to financial news. Cancelling the brokerage account, losing the password for our portfolios, or adding elements of friction to slow an investment decision-making process. Avoiding anything that will entice us away from our plan.
Commitment devices do not have to be entirely restrictive. We might commit to acting only when certain extreme valuation levels are reached. This approach is obviously imperfect compared to an avoidance pact. Setting a high threshold for action, however, at least protects from the worst ravages of noise and overtrading.
A critical part of managing our behavior is understanding the challenges we will face and planning in advance how we will mitigate them. Good investment is primarily about making sensible decisions at the start and avoiding bad decisions on the journey. The problem is that the compulsion to veer off course is likely to be overwhelming.
Most of us want to be long-term investors, but unless we make the right behavioral commitments at the outset the siren song of financial markets will make that an impossible aspiration.
Source: Behavioral Investment by Joe Wiggins
Asset multiplier comments-
- Obsession with short-term market fluctuations makes sense only for day traders who earn money by accumulating minor gains and limiting losses in as many securities as possible.
- For investors with a long-term perspective, it is meaningless to analyze each and every event and its implications on your portfolio.
- Investors should understand clearly that volatility and risk are two different things. Reacting to volatility created by market news will only yield bad decisions i.e., buying at a higher price or selling too low.
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