Investor madness: Emotions cost us money

A Macquarie Bank study shows that most people are unable to put aside their emotions when making investment decisions. They're often over-optimistic when making investments, buying when prices are high then overreacting when markets fall – usually running for cover into safe investments after making a negative return. This applies to shares, mortgages, superannuation and managed funds. The study found it's almost impossible to separate emotions from the investment process, but people have a better chance of making good decisions if this is recognised and emotions are put to work in a positive way. MLC investment manager Susan Gosling said investors often behave irrationally because they are reacting emotionally to the past. Gosling said if people refrained from switching strategies and stopped chasing “hot investments” they would achieve better outcomes over the long term.

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