Unhappy With Your Portfolio Returns? Here’s What You Need to Do to Turn Things Around.
July 7, 2008
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In the 18+ years I’ve been involved in finance, I’ve seen a common thread among investors during bear markets that is extremely detrimental to their financial future. The syndrome I’ve seen afflict many investors is similar to the psychological state that University of Pennsylvania world-renowned psychology professor Dr. Martin Seligman coined “learned helplessness.” This condition is more pronounced in investors that have had their money managed by a large commercial investment firm for many years but often afflicts those that self-direct their investment portfolios as well.
Whenever I’ve spoken to investors that have their portfolios managed by large investment firms after a period such as the past 12 months when many investors world wide have lost 20%, 30% or even 40% of their portfolio value and ask them what they are doing to repair the damage, more often than not, they have replied, “Nothing.” When I have asked them why they would do nothing when they have lost significant portions of their wealth, they always state that their advisors inform them that long-term markets always rise higher, so if they just hold on, they should recoup all their losses over the next several years. In many facets, this response is very similar to the condition of “learned helplessness”. Investors believe that the commercial investment firms are the experts, that they should listen and blindly follow them, and that they don’t have a choice in this matter because they often tell themselves, “I know nothing about investing.”
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