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Investor Psychology

EMOTIONAL CONTROL IS CRUCIAL
   FOR SUCCESS IN THE MARKET !

This is a major element in the equation that requires BOTH a good set of
tools (well-managed mutual funds or stocks and bonds issued by good
companies) AND a skillful user (investor/trader).  If you know all you
possibly could about the fundamental side of the market and a specific
company or fund, but still fall prey to your emotions when buying and
selling, you will fail in profit/loss terms because you will repeatedly buy
high when you are most comfortable -- and sell low when you are most
frightened.

Investors numbering in the millions make that mistake over and over again. 
The bars on the graph just above show the patterns of NET money going into (above the live) or out of (below the line) stock or "equity" mutual funds,
according to data compiled by the Investment Company Institute, with chart
work by the Research Department of Lipper Inc., a Reuters Company. The blue line shows, for easy reference, the trailing 6-month price change of the S&P 500 Index, whether above or below 0%. The graph covers the period from mid-1998 to May 2006.  Take a look and see how strongly people's emotions have affected their (generally bad) timing in buying and redeeming mutual funds!

The tallest upside bars came in the first four months of 2000, exactly when
stocks were topping out after a huge bull market that culminated in the
technology/Internet mania.  People believed there was "no way to go but up" and became heavy net buyers.  The downside bar for September 2001 reflects the panic of investors after the 9/11 attacks.  The deepest downside bar came in July 2002, which turned out to be the psychological bottom of the bear market. Strong buying in early 2006 corresponded with the major averages again approaching their old highs.  The high correlation between returns and net flows shows that people let their emotions rule, rather than being disciplined.  To be a winner, you must be disciplined, which includes doing what makes you uncomfortable.

Updated net flows data are available free on the www.ici.org website: click
on Trends.  New monthly data are published on the next-to-last business day of each month.