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Being Irrational with Investments Nets Irrational Returns -- Long-Time Financial Advisor Unlocks the Secrets of Behavioral Finance to Help Investors Make Better Decisions
The stock market can be similar to the people most investors come in contact with in their lives. Like people, the stock market is prone to mood swings that can take it from irritable lows to euphoric highs in the blink of an eye. Volatile entity that it is, investors who want to enjoy the highs must expect and grow accustom to a simulated roller coaster ride. After all, the stock market is simply an aggregate reflection of all investors' decisions colliding together, rational or not. And while the stock market may behave irrationally at times, so do investors according to Louis Morizio, an Albany-based CERTIFIED FINANCIAL PLANNER™ professional and president of The Center for Financial Planning. Morizio, a believer in behavioral finance, a relatively new field of study that believes many people are irrational when it comes to their investments, says making irrational investment decisions will only lead to irrational returns. "The key to successful investing is to develop a sound investment strategy and give it time to deliver the kind of results you desire," said Morizio. "There are two mistakes many investors make. The first is that they're only prepared to make money in the stock market. They fail to realize that in the stock market you need to expect the unexpected and may lose money at times. The second mistake is not allowing investment strategies time to mature. We live in a society where we want and demand instant gratification, but investing is an area where we can't always get that." One of the hallmarks of behavioral finance is that investors tend to view the possibility of recouping a loss as more important than the possibility of greater gain. This is often why investors hold onto losing investments long after they should have sold. "During the technology boom, stocks like Nortel Networks made millionaires out of its shareholders who rode the Nortel rollercoaster to the top of the hill," said Morizio. "But once the stock started to decline, some (irrational) people held their shares only to see the stock tumble to less than $2. No matter how low the price dropped, they held out hope that the stock would eventually rebound." Traditional investment theorists believe that markets are efficient and the psychology of investors has no bearing on the stock market. According to those theorists, any new information relevant to a company's value is digested by the market and the effect is seen in the price of a share of that company's stock. Morizio suggests investors follow four tips to avoid being an irrational investor. BE COOL According to Morizio, investors need to keep a cool head about their investments. "The worst thing an investor can do is make a rash choice about what to do with an investment," says Morizio. "Just because an investment isn't netting the returns you would like at the time, doesn't necessarily mean that it's time to get rid of it. Investments such as bonds typically drop in value during a rising interest rate environment, and rise during a declining interest rate environment. That behavior speaks nothing to the value of the underlying security as an investment. BE FOCUSED "The biggest mistake investors make is that they fail to develop a sound investment strategy," advises Morizio. "When a solid investment strategy is developed -- and adhered to -- returns will generally follow. It's typically the irrational investors that have irrational returns in their portfolios." BE INDIVIDUAL Following the herd of investors is not always the smartest move an investor can make. "It is typical for investors to fear that other people have better or more information than they do," says Morizio." "As a result, they follow the herd when it comes to their investments. And the herd can often be wrong. Investors will do themselves a favor by educating themselves and making rational decisions about their investments rather than just trying to emulate what others are doing." BE ADVISED It's tough to follow market trends, research investments and make sound decisions - especially if that is not your full-time job. "Because most people have another full-time job, a family and a personal life, it makes sense to hire a competent financial advisor to help you make smart money related decisions," Morizio says. "An experienced CERTIFIED FINANCIAL PLANNER™ professional can help you avoid costly mistakes." ABOUT LOU MORIZIO AND THE CENTER FOR FINANCIAL PLANNING Lou Morizio, the founder and president of The Center for Financial Planning (TCFP) in Albany, New York, has been serving clients as a financial advisor for over 20 years. TCFP is an independent investment advisory firm that provides comprehensive financial planning and investment management services to individuals and families. Morizio is a CERTIFIED FINANCIAL PLANNERTM professional. Additionally, in 2006 he completed studies and passed a rigorous certification examination through the Center of Fiduciary Studies at the University of Pittsburgh, earning him the AIFA® designation (Accredited Investment Fiduciary Analyst). AIFA designees are equipped with the knowledge necessary to understand and implement the prudent investment processes for investment stewards, investment advisors, and investment managers, as well as to perform a fiduciary assessment to verify or certify an entity's conformity to a "global fiduciary standard of excellence." Long active as an industry leader, Morizio served two years as president of the local chapter of the Financial Planning Association (the nation's largest organization of professionals dedicated to championing the financial planning process). Morizio holds a bachelor's degree in public affairs from the State University of New York at Albany and two associate's degrees in the areas of criminal justice and security administration from Hudson Valley Community College. He has taught various investment classes at area colleges, including the Certified Financial Planner Board of Standards' CFP® certification program. A talented educator and presenter, Morizio was also a member of the National Speakers Association. He is actively involved with the Make-A-Wish Foundation, serving as an official wish granter for the past three years. NOTE: Louis Morizio is available to speak on behavioral finance and all aspects of personal financial planning. When you need an expert to discuss complicated financial topics -- in an entertaining and easy-to-understand way, contact Louis Morizio at the Center for Financial Planning. Thank you! Securities offered through Securities America, Inc. Member NASD/SIPC, Louis Morizio Registered Representative. Advisory services offered through The Center for Financial Planning. The Center for Financial Planning and Securities America, Inc. are separate entities. |
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