This is Your Brain On Investing

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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wak
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This is Your Brain On Investing

Post by wak » Fri Feb 12, 2016 10:51 am

There is an interesting article in this morning's online WSJ regarding the market and investors emotions. It has often occurred to me that the most important reason to invest in index funds is that it takes a lot of the emotion out of the investment equation, not all mind you, but most of it.

Any thoughts?

IPer
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Re: This is Your Brain On Investing

Post by IPer » Fri Feb 12, 2016 10:55 am

I am at the opposite, I am trying to feel more passionate and emotional about my holdings. I have
been meditating about that for a few weeks, trying to stir my emotions. I got real fired up when I
realized what Intel, Microsoft and Mc Donalds numbers look like for the past 2 years...oh well back
to staring at the wall...
Read the Wiki Wiki !

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Toons
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Re: This is Your Brain On Investing

Post by Toons » Fri Feb 12, 2016 10:57 am

Yes.
Investing in Index Funds is as exciting as,,,,,,,
Watching Paint Dry :sharebeer
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

wolf359
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Re: This is Your Brain On Investing

Post by wolf359 » Fri Feb 12, 2016 11:03 am

Wow, this is the first WSJ article in a while that I can read (you have to google it first). Maybe their paywall is letting us through again.

Yes, investing in index funds is much less emotional if you do it right. However, studies show that even index fund investors are subject to chasing market performance and selling at the wrong time.

I also found it interesting that they were talking about index funds as the solution without mentioning index funds once.

snarlyjack
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Re: This is Your Brain On Investing

Post by snarlyjack » Fri Feb 12, 2016 12:32 pm

I don't care what the stock market does.

My plan is to dollar cost average (DCA) for the next 40 years.
Actually, I hope the market goes down...more shares...for less money...
when I DCA.

Rodc
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Re: This is Your Brain On Investing

Post by Rodc » Fri Feb 12, 2016 1:01 pm

wak wrote:There is an interesting article in this morning's online WSJ regarding the market and investors emotions. It has often occurred to me that the most important reason to invest in index funds is that it takes a lot of the emotion out of the investment equation, not all mind you, but most of it.

Any thoughts?
Index funds help. But it also helps to have a written plan for what allocation you want to hold and under what conditions, if any, you will change that allocation.

If you bounce between 100% STM and 100% TBM and every allocation in between based on emotion that is not helpful despite the use of index funds.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Fallible
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Re: This is Your Brain On Investing

Post by Fallible » Fri Feb 12, 2016 1:06 pm

wak wrote:There is an interesting article in this morning's online WSJ regarding the market and investors emotions. It has often occurred to me that the most important reason to invest in index funds is that it takes a lot of the emotion out of the investment equation, not all mind you, but most of it.

Any thoughts?
Have not yet seen the article, but controlling emotions and learning self-discipline, aided by keeping investing simple, is very much what the Bogleheads' philosophy is all about.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

Dulocracy
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Re: This is Your Brain On Investing

Post by Dulocracy » Fri Feb 12, 2016 1:20 pm

I get really happy when stocks go down, so I can buy them lower.

I get really happy when stocks go up, as my portfolio value is increasing.

I am like that kid that is just really happy that someone invited him to the party.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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dratkinson
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Re: This is Your Brain On Investing

Post by dratkinson » Fri Feb 12, 2016 2:31 pm

The article's chart looked familiar....

Image

Here it is....

Image

The forum was talking about this 7 months ago: Hindsight Bias in Investing: viewtopic.php?p=2521660#p2521660

Of late I've been too fixated on planning the most efficient way to TLH... to worry about a market decline. But now that I think about it... :shock:. Oxymoron? Cognitive dissonance? IPS-induces misdirection/distraction?

I think forum members may be somewhat more immune to emotional upset due to market downturns as we have lot's of new posts on TLHing and rebalancing to occupy our time, then. So when the market goes up, we make money. And when the market goes down, we are distracted into making money... we just don't see it until tax time or the market recovers.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

Fallible
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Re: This is Your Brain On Investing

Post by Fallible » Fri Feb 12, 2016 6:13 pm

wolf359 wrote:...Yes, investing in index funds is much less emotional if you do it right. However, studies show that even index fund investors are subject to chasing market performance and selling at the wrong time. ...
It's not just index funds alone, but the relative simplicity of passive investing vs actively trying to beat the market that can remove much of the emotion. And it's also having fewer funds, and how one sets up an AA based on need, ability, and willingness to take risk.

For more about the brain and investing, read Jason Zweig's book, "Your Money and Your Brain."
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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JoMoney
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Re: This is Your Brain On Investing

Post by JoMoney » Fri Feb 12, 2016 7:32 pm

I was just browsing the (new'ish) book "Phishing For Phools" by George Akerlof and Robert Shiller
They make some points regarding markets, beyond just our own brains doing dumb things, there are market participants actively trying to influence us into making bad decisions to take advantage of our vulnerabilities.

Having a reasonable plan that aims for market returns is a great strategy that helps avoid the serious mistakes that can come from trying to get to tricky and trying to score something extra. We know the aggregate returns of the market aren't going to generate anything extra in aggregate for engaging in some active strategy. There are some who want believe the market is full of rational participants pricing risk and perhaps "risk premiums" efficiently in some optimal way in accordance with their individual "risk preferences". But if you're not in that camp, you better be pretty certain that you're the one doing the "phishing", and not playing the "phool" to some financial industry marketing.
Benjamin Graham in The Intelligent Investor wrote:The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses...
...If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse.
Since anyone—by just buying and holding a representative list—can equal the performance of the market averages, it would seem a comparatively simple matter to “beat the averages”; but as a matter of fact the proportion of smart people who try this and fail is surprisingly large.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

hnzw rui
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Re: This is Your Brain On Investing

Post by hnzw rui » Sat Feb 13, 2016 1:40 am

Fallible wrote:
wolf359 wrote:...Yes, investing in index funds is much less emotional if you do it right. However, studies show that even index fund investors are subject to chasing market performance and selling at the wrong time. ...
It's not just index funds alone, but the relative simplicity of passive investing vs actively trying to beat the market that can remove much of the emotion. And it's also having fewer funds, and how one sets up an AA based on need, ability, and willingness to take risk.
+1. I've simplified to Vanguard Target 2040 for the bulk of my portfolio (and all new contributions). That keeps emotions out of rebalancing and also blunts performance of individual components. I just see aggregate returns - at least when I bother to look. Having the fund auto-rebalance and having auto-invest set up means I don't need to monitor it. Probably for the best since I'm always tempted to tinker when I look at the portfolio.

jimkinny
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Re: This is Your Brain On Investing

Post by jimkinny » Sat Feb 13, 2016 9:00 am

Fallible wrote:
wolf359 wrote:...Yes, investing in index funds is much less emotional if you do it right. However, studies show that even index fund investors are subject to chasing market performance and selling at the wrong time. ...
It's not just index funds alone, but the relative simplicity of passive investing vs actively trying to beat the market that can remove much of the emotion. And it's also having fewer funds, and how one sets up an AA based on need, ability, and willingness to take risk.

For more about the brain and investing, read Jason Zweig's book, "Your Money and Your Brain."
Fallible, could not agree more.

Getting risk right makes dealing with my brain, that wants to run or attack, a lot easier. Giving up on the idea that I am somehow able to pick an active fund that will perform better in the future than an appropriate index was pretty easy compared to getting an appropriate risk level.

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cheese_breath
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Re: This is Your Brain On Investing

Post by cheese_breath » Sat Feb 13, 2016 10:03 am

At first I was going to say if I have TSM or S&P 500 index funds I can get as emotional watching the S&P go up or down as I would watching an individual stock. But after more thought I changed my mind as the individual stock may have more drastic volatility than the broader based index fund. Either way though I try to keep my emotions in check and not let them guide me in making my investing decisions.
The surest way to know the future is when it becomes the past.

wolf359
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Re: This is Your Brain On Investing

Post by wolf359 » Wed Feb 17, 2016 12:12 pm

cheese_breath wrote:At first I was going to say if I have TSM or S&P 500 index funds I can get as emotional watching the S&P go up or down as I would watching an individual stock. But after more thought I changed my mind as the individual stock may have more drastic volatility than the broader based index fund. Either way though I try to keep my emotions in check and not let them guide me in making my investing decisions.
The design of the Vanguard website really helps in this regard. It lets me easily see my overall portfolio balance, but it makes me dig in to see individual holdings. Even then, it is presented in a way that I have to think about it and look carefully to see if they went up or down and how much. It's displayed as a number in a table, not a chart.

Therefore, since I'm holding both stocks and bonds, and those stocks are further diversified, my total portfolio balance doesn't typically move all that much. It is VERY different from when I was trading individual stocks.

2016 has been an exception, but individual stocks are worse. If I watch CNBC during the day, I see huge market moves. If I look at what Vanguard shows (mutual funds only mark to the market at the end of the day), things look much less volatile. It's actually been fun to watch -- big gains, near panics, and at the end of the day the market is where it was. I can handle this.

jayhawkerbeef
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Re: This is Your Brain On Investing

Post by jayhawkerbeef » Wed Feb 17, 2016 12:31 pm

wolf359 wrote:
cheese_breath wrote:
2016 has been an exception, but individual stocks are worse. If I watch CNBC during the day, I see huge market moves. If I look at what Vanguard shows (mutual funds only mark to the market at the end of the day), things look much less volatile. It's actually been fun to watch -- big gains, near panics, and at the end of the day the market is where it was. I can handle this.
Watching CNBC puts the emotion into it. I've made mistakes, that I didn't intend to make, due to paying too close attention to the mainstream media.

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cheese_breath
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Re: This is Your Brain On Investing

Post by cheese_breath » Wed Feb 17, 2016 2:46 pm

jayhawk wrote:
wolf359 wrote:
cheese_breath wrote:
2016 has been an exception, but individual stocks are worse. If I watch CNBC during the day, I see huge market moves. If I look at what Vanguard shows (mutual funds only mark to the market at the end of the day), things look much less volatile. It's actually been fun to watch -- big gains, near panics, and at the end of the day the market is where it was. I can handle this.
Watching CNBC puts the emotion into it. I've made mistakes, that I didn't intend to make, due to paying too close attention to the mainstream media.
wolf359 wrote the above quote which is erroneously attributed to me

cb.
The surest way to know the future is when it becomes the past.

wolf359
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Re: This is Your Brain On Investing

Post by wolf359 » Thu Feb 18, 2016 9:31 am

jayhawk wrote:
wolf359 wrote:
2016 has been an exception, but individual stocks are worse. If I watch CNBC during the day, I see huge market moves. If I look at what Vanguard shows (mutual funds only mark to the market at the end of the day), things look much less volatile. It's actually been fun to watch -- big gains, near panics, and at the end of the day the market is where it was. I can handle this.
Watching CNBC puts the emotion into it. I've made mistakes, that I didn't intend to make, due to paying too close attention to the mainstream media.

I can't avoid CNBC. It's constantly playing in our breakroom at work.

During a period when I gave up on the markets my brain just automatically tuned it out. When I discovered bogleheads and got restarted on investments in a big way, I couldn't help but tune back in. Once you accept that you're taking the low-cost, indexing path and will stick to your plan, financial news becomes like a national weather report -- it's interesting, but it mostly isn't about you.

jayhawkerbeef
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Re: This is Your Brain On Investing

Post by jayhawkerbeef » Thu Feb 18, 2016 9:44 am

Wolf, you hit the nail on the head about tuning it out. Now I can mostly not get wrapped up into it and just go about my day. Something about a RBD that I do like to hear all the noise but I do not change course; looking for opportunities to buy or check the portfolio to rebalance.

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