A blog at the Wall Street Journal notes that investors tend to think of risk as something that falls as prices rise:
If the history of the financial markets and the psychology of investing have anything to teach us, it is that present emotion and future returns are inversely correlated. Today’s feelings of pain and fear are the building blocks for tomorrow’s wealth. Eras of good feeling are terrible times to buy stocks.
The corollary is that perceived risk and actual risk tend to be polar opposites. When did your house feel like the safest investment? Just as its appraised value hit an all-time high, of course. The Dow felt safe when it was at 14000, and it feels risky as hell now that it is clinging to the edge of 8000 with its fingernails. That’s perceived risk: low when prices go up, and high when prices go down."
Investors often could do better doing the opposite of what they think will happen.
A blog at the Wall Street Journal notes that investors tend to think of risk as something that falls as prices rise:
If the history of the financial markets and the psychology of investing have anything to teach us, it is that present emotion and future returns are inversely correlated. Today’s feelings of pain and fear are the building blocks for tomorrow’s wealth. Eras of good feeling are terrible times to buy stocks.
The corollary is that perceived risk and actual risk tend to be polar opposites. When did your house feel like the safest investment? Just as its appraised value hit an all-time high, of course. The Dow felt safe when it was at 14000, and it feels risky as hell now that it is clinging to the edge of 8000 with its fingernails. That’s perceived risk: low when prices go up, and high when prices go down."
Investors often could do better doing the opposite of what they think will happen.
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