By Raghu Gullapalli, SmartStops.net contributor
If you are not aware of the all consuming political debate about the U.S debt ceiling that has consumed the country, then you’ve more than likely been living in a cave. Our distinguished representatives have debated the possibility of increasing the national debt and solving future deficit problems ad nauseum. Surprise, surprise we are no closer to a solution with four days to go to the deadline then we were four months ago. Unfortunately our bloviating leadership does not realize the tremendous real life consequences of this political drama.
Aside from the embarrassment of the possibility defaulting on our financial obligations as a country for the first time, there is the almost assured downgrade of our national credit rating. This downgrade may well cripple any chance of a recovery in our economy and will have cataclysmic affects in the worldwide equity markets. What does that mean for investors? Any fond memories of 2008?
For traders like me, that would involve shorting the financials, industrials, the dollar index or anything with interest rate exposure and hedging myself by buying gold, oil and going long the iPath S&P 500 VIX Short-Term Futures ETN (VXX). But for the average investor, Financial Armageddon: Part Deux.
Our goal at SmartStops - to teach all investors to think about risk management from the moment they start thinking about entering their position. Portfolio management theory for diversification is not enough to offer the protection all investors deserve.
This book , Inside the Investor’s Brain – the power of Mind over Money was published by Dr. Richard Peterson in 2007. As one book reviewer wrote: “ The typical investor is his/her own worst enemy, doesn’t have a long-term investment strategy, cuts profits short and lets losses pile trying to break even, does not use stop loss orders, buys near the highs and sells near the lows, and likes to chase the hottest mutual funds or stocks. If you see yourself in any of these statements, then join the crowd. To become a better investor or trader it is crucial to understand how your brain impacts your decision-making. “
Some of the findings presented in Peterson’s book help resolve theoretical anomalies in finance. For instance, he cites research that shows that people typically weight losses twice as heavily as gains in their decision making; and, consequently, peoples’ decisions are made differently if they are “framed” in a loss-taking versus gains making context. A major reason for this difference is that different parts of peoples’ brains are engaged when considering potential losses rather than considering potential gains. Depending upon which part of a person’s brain is engaged, people will behave differently–which can explain why people and markets typically behave differently in “bull” versus “bear” markets, and why many people both buy insurance and gamble.