Introduction
It is important for me to read a book chapter today. I like to read the book called "The boglehead guide to investing". I believe that I should invest time to read a few investment books, and then learn the basics of investment first.
Book chapter reading
I like to check your emotions at the door. Here are common mistakes.- Playing your hunches
- Blindly following the crowd or an investment guru
- Trying too hard
- Acting on a hot tip
- Relying on supreme self-confidence
- Going for it to make a quick killing
- Playing it ultra-safe
- A multitude of other emotionally based on investment decisions
Behavioral economics
Common mistakes
- Buy emotionally and justify with logic
Late 1960s, Amos Tversky and Daniel Kahneman
Judgemental heuristics
Greed and fear
Thanks to greed, investor excitedly chase performance and buy when the market is up. Thanks to fear, they panic and sell when the market is down and lock in their losses.
It is hard to make a profit when you buy high and sell low.
- Recency bias -
- Ego and overconfidence
- Loss aversion
- Paralysis by analysis
- The endowment effect
- Following the herd
- Mental accounting
- Anchoring
- Financial negligence
- Keeping emotions in check
Over confidence
Case study, 1994, a hedge fund called Long Term Capital Management (LTCM), two noble prize-winning economists
Over confidence Common mistakes
- Pick stocks
- Time the market
- Know more about what's going to happen in the economy than other people do
Loss aversion
Common mistakes
- Do you check your portfolio every day?
- Do you sell a stock or mutual fund when it earn a healthy return to lock in the profit?
- Do you sell stocks/mutual funds whenever you see them going down?
- Are you a young person who keeps most of your savings in bonds or safe, ultraconservative investments?
Consider the taxes due on the interest earned and inflation, there is no safe as those who are loss averse believe it to be.
Paralysis by analysis
As a result, some people don't make a choice and don't invest. The investment trap called "Paralysis by analysis" is the first cousin to loss aversion.
How to intelligently manage risk
- Pay off your credit card and high interest debts and stay out of debt
- Formulate a simple, sound asset allocation plan and stick to it
- Systematically save and invest a part of each paycheck in accordance with the asset allocation plan
- Invest most or all of your money in index funds
- Keep your costs of investing and taxes low
- Don't try to time the market
- Tune out the noise
- Rebalance your portfolio when necessary and stick with your plan
You will buy low, sell high and have the power of compounding working in your favor.
A smart investor
I like to learn the basics of investment, so I like to count how many hours I spend to read the investment books.
In January 2019, I came back to stock market and now after 12 months I have over 5000 unrealized gain on my less than $100,000 portfolios.
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