Monday, May 2, 2011

Anticipating the Unexpected

Common sense will tell you that if you plan ahead before making big decisions in your life, you're more likely to make the right decision. A new paper from two behavioral economists, working with Allianz Global Investors, tries to apply that thinking to investing decisions, pointing out how committing to a plan before you engage in it can help you make sure it's fulfilled.

For instance, the authors recommend that both individual investors and their financial advisors sign on to an agreement as to how they'll react when the market moves in different directions. They say that both parties should commit to buying more stocks if the market loses 25 percent of its value, and selling off overvalued stocks if the market rises by 25 percent. It's a little counterintuitive, but it's basically just a codification of the classic "buy low, sell high" strategy that too many investors lose sight of during market swings.

Would it work to actually commit to such a strategy? It's hard to say, but there's certainly a lot of value to talking with your advisor about what you would do if the market takes a sudden lurch in one direction or another, long before it actually happens. If you'd like to talk about what your strategy would be in such a situation, feel free to drop me a line or give me a call.

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