Investing Rationally?

What do investors want?

Photo: Simon Steinberger. Source: Pixabay

Fifty years ago analysts assumed that all investors should care about is getting high returns with low risk. People who traded a lot, or concentrated their portfolios, or did something other than what conventional finance recommended were labeled irrational.

But what we do seems rational to us at the time. A dress from Filene’s Basement may be just as functional as a $2,000 designer dress, but it may not be as beautiful, or it may not convey the right message those around us. Clothes have a utilitarian purpose, but they also serve our expressive and emotional needs.

The same thing happens when we invest. We want the same things from our investments that we want from the rest of life. We want to feel secure. We want to be true to our values. We want to believe that we can do better. And we don’t want someone taking advantage of us. Our finances should serve these larger objectives – toward the goal of our well-being.

That’s why a company that has no debt, strong management, and a high growth rate may not be a good investment for you if it keeps you up at night. At the same time, we need to know – not just believe – that diversification works: trees don’t grow straight to heaven, and what’s out-of-fashion eventually changes places with what’s in fashion. Investing is an ever-shifting kaleidoscope of fundamentals, trends, and economics.

Artist: Martha Sky Radford. Source: Wikipedia

Behavioral finance teaches us that how we invest can be just as important was what we invest in. Investors want what everyone wants: to feel good about their money.

Douglas R. Tengdin, CFA

Chief Investment Officer

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