In
a world of fast moving markets, investors win by "not making mistakes" rather
than "swinging for the fence" in hopes of a " home run." Human emotions
dictate stock prices over the short-term, because most investors have unrealistic
expectations. Unrealistic expectations, of course, manifest themselves as
fear and greed, which cause the market to move stock prices to extreme overbought
and oversold positions. The single greatest cause of poor judgment in the
wealth management arena is investors' failure to realize that their individual
decisions about money are primarily emotional. Once they convince themselves
otherwise, then their conclusions are rational and justified.
Risk is usually defined as portfolio volatility in up and down markets, but risk can also represent the potential for permanent investment loss. Indeed, the primary concern for most investors is the fear that, over the short-term, their portfolios will lose value. Accordingly, most investors assess their investment performance over the short-term, when, in fact, their portfolios have long-term objectives. Sophisticated investors who have been involved with the public markets for decades, however, realize that volatility diminishes over time and that temporary declines have almost always reversed for those individuals with longer-term horizons.
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