Take emotions out of investing to boost your bottom line

A summer of stock market ups and downs has many of us nervousabout our financial future.

Lack of stability causes worry, and when we worry too much, ouremotions take over. But if we take lessons from others' research, wemay realize we worry too much about our investments. Those who takeemotions out of investing can end up winners.

A recent report by DALBAR Inc., a Boston investment analysisfirm, found stock investors who moved in and out of the market didnot make as much money as those who held tight.

Between 1987 and 2005, stock funds grew 4.7 percent per year onaverage. Jittery investors who moved back and forth between stocksand safer investments saw their money grow 3.7 percent per year onaverage.

The firm concluded behavior, not investment perfor- mance,affects how well investors make money in the market.

"Investment returns increase when natural characteristics arereplaced by disciplined investment behavior," the report said.

So what causes us to take irrational action when it comes toinvesting? Apparently it's not much different from any other knee-jerk reaction.

Money magazine writer Jason Zweig examined investor behavior inhis book "Your Money & Your Brain," released this month (Simon &Schuster, $26).

He spent time with brain researchers to learn how brain activitycorrelates to investment decision-making.

Our brain is wired to be more emotional rather than logical, hewrites, which explains our bad money decisions, whether it'sinvesting or shopping (now you know why Starbucks is successful).

Our brain gives us two options for decisionmaking -- decide nowor decide later.

The first is called reflexive thinking, Zweig writes. Thishappens when we make a quick decision after sudden stimulus, such asbuy now at half-price or sell now as the market plunges.

The Internet bubble was the ultimate reflexive period in recentinvesting history. Everyone was thinking "There's no way I can lose,everything is going up," instead of analyzing whether those Internetcompanies were making money or had long-term prospects, and thenselling all at once as everyone else did.

The second is called reflective thinking. This is when we taketime to analyze a situation, or sleep on it.

By being reflective, we give our brain a chance to come up withthoughts we wouldn't have thought of when being impulsive.

You can prevent emotions from taking over by making your ownrules for investing, Zweig writes, so when you encounter emotionaltimes in selling and buying you can compare whether your actionwould meet your criteria.

Zweig also writes about how to overcome major emotions wheninvesting:

Greed: The higher the promised return, the more you investigate.If someone else made a killing, your chances are unlikely. Take abreak to reflect before being tempted by greed.

Prediction: Don't buy or sell because you think the market ismoving down or up. Invest at regular intervals, known as dollar-cost averaging, or sell when needed. Look at your past predictionsand compare what happened then with your current prediction.

Confidence: Study your mistakes and avoid repeating them to buildconfidence.

Risk: "Sleep on it" before investing. Make rules for what risksyou are willing to take.

Fear: When you feel overwhelmed by fear, take a break. Questionyour action before you make a decision.

Regret: Being afraid that your decision will cause so much regretthat you won't do anything creates "portfolio paralysis." Admit toand learn from your mistakes and move on.

By having investing rules you can look back to explain why youmade a decision.

CONTACT THE WRITER: dan.serra@gazette.com