Joy & Pain
Peter Katevatis - Feb 18, 2016
In the world of investments (much like life) we have swings between joy and pain. There is the elation and joy of picking a winning investment and the frustration and pain of watching a stock get hammered for a minor setback in earnings. Logic wo
In the world of investments (much like life) we have swings between joy and pain. There is the elation and joy of picking a winning investment and the frustration and pain of watching a stock get hammered for a minor setback in earnings.
Logic would lead us to believe that if our account appreciated by $10,000 then depreciated by $10,000 we would feel the same. The reality is that feelings are not economic, they are emotional. The emotional joy we get from the $10,000 appreciation is dwarfed by the pain of the $10,000 loss.
This psychological effect is written in a great book by Richard Thaler, called MISBEHAVING – The Making of Behavioral Economics. Economists tend to discount the human factor, when the reality is that emotion often drives our decision making.
Too often, investors are only willing to buy when the markets are peaking (it’s been good so now is the time to be buying, right?). And sadly, investors sell when the markets are dropping (it’s going to drop forever, right?). Beyond the science by Thaler called myopic loss aversion it is important that your risk tolerance and investment needs are properly identified.
Emotions are wonderful things. They give us human bonds and become a celebration of our individuality. We thrive on emotional connections with our family and friends and celebrate those who enrichen our lives. However, when it comes to investing… emotion often does more harm than good.
Canaccord Genuity’s GPS Optimized Portfolios come in five different risk levels. They range from 2% of your capital at risk to 12%. At the 4th risk level (9%) it operates under the assumption that you can handle a 9% loss… but not a 10% loss. When markets showed excessive stress on February 10th, 2016 the 9% risk portfolio responded with a defensive position of 50% cash and 20% Government of Canada bonds. Through this ability to adapt to falling markets the GPS Optimized Portfolios will limit any losses to preserve capital for future needs.
The key to controlling your joy & pain is to build a solid Base. See what I did there?
If you would like to assess your investment needs and risk tolerance, please do not hesitate to contact me. Our team will work through the complementary process of identifying your needs and make sure you are on the right path. Don’t waste emotional capital on your investments. Save your emotions for your passions.