Perhaps the hardest part of being an investor is refereeing the struggle between your left brain and your right brain. Indeed, some of you have experienced this conflict whenever the stock market takes a tumultuous dip or sudden climb.
The left brain is analytical. The right brain is emotional. The best investors make decisions using their left brain.
Which, of course, makes perfect sense. Unless you are thinking with your right brain.
Your left brain’s investing knowledge
Take a logical, long-view approach to your investments – a perspective your left brain knows (or should know).
- Over the long term, the stock market is highly likely to go up.
- 10-year trends are meaningful. 10-day trends are meaningless.
- The chances any individual can successfully time the market are low. That’s because you have to know when to sell and when to buy back in.
- When you sell with a gain in a taxable account, you will pay a tax you otherwise could postpone paying for years.
- Long-term, the surest way to lose money is to own cash. Over decades, cash will almost always lose purchasing power.
Your right brain’s financial reasoning
The center of imagination and emotion, your right brain is easily influenced by abrupt market swings.
- Following the stock market’s daily gyrations on the TV or internet helps your decision-making.
- 1-week, 1-month, or 1-year performance is a good indicator of the future.
- If you sell now and buy back “when things settle down”, you will generate a decent return without all the ups and downs.
- Only a billionaire can afford to be patient.
The human brain is wired to fail in investing. Studies show we suffer more pain from a loss than satisfaction from a gain – this is known as loss aversion.
So, how can you win the right brain, left brain investing battle?
- Never make an investment decision under pressure. Stop and think.
- Look at your long-term financial plan.
- Write down the pros and cons of any action.
- Talk to someone (or several people) you trust.
- Wait days (or, better, weeks or months).
In investing, doing nothing is often the right decision.