12882 Views | November 26, 2019
There are several reasons for an investment portfolio underperforming over time: poor stock selection, sub-optimal asset allocation decisions, mistimed trades, too much trading, investing based on a gut feeling, and so on. Ultimately, it boils down to the fact that an investors’ worst enemy – almost always – is himself or herself.
The field of behavioral finance is dedicated to understanding why and how investors themselves become the reasons for their investments underperforming. In this communication, we discuss one mistake that investors make – reacting to negative news – and its implications.
How to react to news – negative or positive
Changing your investment strategy based on negative news is a mistake; in fact, spontaneous and knee-jerk reactions to any news is a mistake. You will be greeted with tons of news each day. Responding to news updates without due thought and analysis (buying or selling stocks) will invariably lead to mistakes.
Any of these news updates triggers worry and fear in investors’ minds making them sell their investments in haste. However, they could be disappointed if these stocks make positive price moves going forward.
Having said this, we are not implying that you should simply ignore news – whether negative or positive. What is critical is that you must objectively analyze news updates to arrive at a thoughtful conclusion before deciding whether to buy/buy more/sell partly/sell your entire holding/hold. Besides, revisit the reasons why you bought the stock in the first place to decide whether those reasons still hold true.
To better help our clients prosper in this market landscape, StockAxis has released our Stock Selection Process and Research Methodology report. This report gives you a comprehensive view of how we analyze companies and the parameters we consider during the research process.