Emotions often get in the way when it comes to investing your hard earned money. Our decisions to buy or sell a stock is clouded by our biases, the news cycle, the collective thinking at the time, our previous experiences, and many more factors. Self-discipline is indeed a virtue that gets mentioned by professional fund managers as one of their strengths in stock-picking.
Chasing investment performance is always a zero-sum game. Sometimes, you may get lucky, but other times you may not do so well. By the time you act on an impulse to buy or sell, you probably will miss out on any advantage you think you might gain. Basing your decisions on market's ups and downs often does much more harm than good.
To protect yourself from losses, it is best to keep emotions in check. One way to do that would be to have a sound long-term financial plan and sticking to it during market's ups and downs. Your financial plan should include asset mix that is tailored to your goals, your timeframe, and your risk appetite.
Research shows that asset mix (or asset allocation) is one of the more important factors that ultimately decides your investment returns. Asset mix should include stocks, bonds, and cash. Before you start investing, you should also ensure to have a sizable emergency fund so that you won't be required to sell your assets should emergencies arise. If you have an emergency fund, you won't feel the panic when the markets decline. Read more about Buy & Hold Investing.
The bottom line is that when you take emotions out of your investment decisions, you have a very good chance of reaching your long-term financial goals.
[...] Expense ratio of actively managed funds is higher due to the costs associated with researching and analyzing attractive investments. Every stocks that comes in or goes out needs to be screened against the fund objectives and forecasting trends. To stay competitive and to beat indexes and peer funds, active managers typically trade more. And in doing so, they also incur higher transaction costs paid out as commissions and bid/ask spreads on their trades. When active managers take a profit by selling an investment, they also trigger capital gains taxes. There are inherent risks associated with being a human. The fund managers are subjected to human emotions related to risk aversion, risk taking, group thinking, and chasing performance. Read more about the Psychology of Active Trading. [...]
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