Dealing with Investor Emotions: Anxiety Induced Hyperactivity

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slowtraveler
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Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by slowtraveler » Fri Sep 13, 2019 3:49 am

I have made most of my money through various indexes. The longer I've held, the better. By far. The faster I sell or the more I try to choose any active fund or stocks, the worse I do.

I recently tried a mix of 80/20 small value/gold. I realized so much small value hurts during its frequently long periods of underperformance so I changed my AA. I now have SV 20, US 15, International 15, and REIT 10 with a hedge of LTT 15, Gold 15, and Cash 10 so as a whole, I will likely perform quite well in most conditions and I won't suffer too much FOMO, even if I never have the highest returning portfolio.

The problem: I shifted out of small value right before its run up and I realized I lost 10 Jacob months from shifting right when I did earlier this week vs today.

I told myself to wait to shift until I saw a recent change towards SV outperforming the us and international I'd shift into. I shifted as soon as that begun out of anxiety to make the shift and fear that I had a short time window to act. The next few days all proceeded to be a massive outperformance.

I've made errors like this before and I want to learn from it. How do I stop making these shifts at the worst possible times? How do I stick to a single asset allocation and find peace at that to let it make me the money?

I've learned how to harvest capital losses, cut my losses, and avoid getting caught up in hype so I know I have the capacity to improve my investing behavior.

jacob
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by jacob » Fri Sep 13, 2019 6:48 am

Standard recommendation would be to keep a log writing down the rationale for why you bought a security or a portfolio in the first place and what you expect the outcome to be. The outcome can be a certain price evolution, a rate of change, a hedge, a new market environment. Also write down how confident you are, the level of your conviction.

That's the decision part of the process.

Once you sold, you write down the outcome of the trade. Then you compare.

Humans very often evaluate their decisions based on their outcomes. E.g. betting on a horse or a stock, seeing it lose, and concluding that they made a bad decision. However, it might be that they actually made a good decision but were just unlucky. The opposite certainly also holds. Humans make a bad decision but have a lucky outcome and conclude that they're geniuses.

You can't do anything about luck, but you can figure out how to make better and better decisions. The trading log is one such tool.

Also read:
https://www.amazon.com/Way-Turtle-Metho ... 07148664X/
https://www.amazon.com/Thinking-Bets-Ma ... 078SBSBW3/

7Wannabe5
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by 7Wannabe5 » Fri Sep 13, 2019 7:01 am

@jacob:

Do you think it is better when you are starting out to try out a lot of different strategies for small stakes, while keeping track as you indicated? Also, do you directly apply Bayesian Analysis?

jacob
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by jacob » Fri Sep 13, 2019 7:02 am

No and no.

Seppia
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Seppia » Fri Sep 13, 2019 7:14 am

There is no "perfect" asset allocation (except in hindisght). The "correct" asset allocation is the one that will help you sleep at night and consequently NOT change strategy too often.
Most investing mistakes are due to action, not inaction.
So the standard rule I live by is "in doubt, don't do shit". It saved me many times

jacob
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by jacob » Fri Sep 13, 2019 7:19 am

@Seppia - Yes, this post is also relevant to investing.

http://earlyretirementextreme.com/can-y ... -fast.html

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Bankai
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Bankai » Fri Sep 13, 2019 7:24 am

Seppia wrote:
Fri Sep 13, 2019 7:14 am
Most investing mistakes are due to action, not inaction.


Yes, but... cost of inaction is often higher. Consider all those people who watched their only holding (100% NW) going all the way down to zero.

Nomad
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Nomad » Fri Sep 13, 2019 8:42 am

I've tried a few things. I tried individual stocks and I panicked when they went up or down.
Then I tried stocks with information from Stockopedia, that was much better but still, I didn't have the personality for it.
Then I did fixed asset allocations of funds and ETF's but picked the funds via a fund screener - which was better for me.
Now, I'm half in two excellent global funds and half is a timing strategy based on the performance of asset class in the preceding 3 - 6 months.
I check the market once a month and make any necessary changes.

However, there a lot of information sources available now online and I believe everyone needs to manage their own finances and needs to learn
the game sufficiently well if they intend to live off their assets for the remainder of their life.
A crucial part of a strategy is backtesting with historical data - as much as is humanly possible.

Jason
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Jason » Fri Sep 13, 2019 11:51 am

I recently did this with a beaten down stock I owned that I was waiting to get back to my original buy point. The second I was made whole, I sold the stock and bought something else. The stock I sold went on a tear and greatly outperformed the stock I bought.

Regret in investments, as I see it, comes in three forms:

(1) Not buying a stock;
(2) Buying and selling too early;
(3) Buying and selling too late;

In my experience, by far, I have hurt myself with #2. #1 hurts the least because it is purely speculative i.e. I should have bought Netflix etc. #3 is usually lesser gains as opposed to a complete tank job.

I don't see it as asset allocation, I see it as JLF said, "Why did I buy the stock in the first place." Most companies that have staying power go through cycles. The worst comments I see on stock trading boards are "This money would be better used somewhere else." That is not investing and I fell for that line of thinking. Now in the long run, maybe I made the right decision. I don't know. But if I did, I made it for the wrong reasons. And that eats at my soul because I knew better.

Edit: When I first started on line trading, fees were close $9.99. Now they are in half. I think this has hurt me. That additional fee kept me more wary of the peril of hyper trading.

Sclass
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Sclass » Fri Sep 20, 2019 8:01 am

A friend of mine had some really good advice. He’s a master stock trader and happens to be a very good electrical engineer and computer scientist. He used to say if you hit compile and your code compiles and you don’t get any error messages you’re not pushing things hard enough.

I try to apply this to my investing. When I started out, or for the first ten years or so, I’d recoil at the thought of losing money. It may have actually felt worse than experiencing an actual loss.

Then I started getting more daring. I made money and lost money. I had some bad outcomes when I lost half. That changed especially when I found out how easy it was to make it back if I kept trying and kept being daring.

I like the Taleb question which do you prefer?

1 make a million.
2 make two million lose a million.

Everyone wants one. I’ve never been able to do anything but two. I think it has to do with a statistical sweet spot I’ve wandered into. If you’re trying to hard to be perfect you don’t win enough. If you gamble too hard you get wiped out.

And so I’m left with the occasional big loss. And it is painful psychologically. I’ve gotten better at taking it with seasoning. But as I look back, it was necessary to go through all this to get to where I am. And I am in a good place.

Not the best place I could have been. I lament some of the big winners I gave up on. I usually don’t regret the losers I cut my losses on. But I try not to worry too much about water under the bridge. I comfort myself by thinking about how little I started out with and where I am now...not where I’d be if I’d made perfect choices for the last twenty five years of trading.

I never thought about commissions much. I used to pay $25 a trade when I used a phone (like “press one to buy press two to sell” ) to buy stocks. It was chump change. I would pay many times that to have a shot at pressing those keys again.

Jason
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Jason » Fri Sep 20, 2019 9:24 am

I linked this in another thread but what the hey, I got a lot out of it:

https://www.fidelity.com/viewpoints/inv ... t-strategy

The basic premise is master of your domain. And forget about economics. Lynch, Buffet, guys like them, seem to have attributes you see in great athletes and artists who can focus on performance despite the noise in the stadium.

IlliniDave
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by IlliniDave » Fri Sep 20, 2019 9:41 am

I've done well executing a lot of foot-dragging and "thinking about it" after being invested. Interestingly, I think one of the more common behavioral errors is too much foot-dragging and "thinking about it" before (or in between) being invested.

That's not to say I don't ever change things. But most significant changes, actually all I can remember, were ultimately prompted by changes in my situation rather than by changes I perceived out in the financial landscape.

I've gotten pretty good at shaking off all the woulda-coulda-shouldas. It also helps that over time I've learned to make the goal of the game simply to do well enough to support my overall life goals (the stash serves me, I don't serve the stash) instead of gaining the highest total over a given time increment. For me that translates to, roughly, "Just don't screw up".

Tyler9000
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Tyler9000 » Fri Sep 20, 2019 9:48 am

@slowtraveler -- I can't help but notice that your post mentions "underperformance" or "outperformance" multiple times. So it strikes me that a big contributor to your core frustration is your insistence on always comparing your investments to some sort of benchmark rather than simply being happy with their independent performance. That's one reason why I spend a lot of time making charts showing the returns for every investing period of a portfolio. Compare an investment to itself rather than to an arbitrary outside benchmark, and in my experience normal market noise will be easier to identify and accept.

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