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Investing Rationally If Markets Get Erratic

August 15th, 2013

technical bounceIt can be hard to invest rationally when markets are volatile, but Russ is expecting markets to be just that come September. Knowing that market volatility can lead to bad investing behaviors, Russ highlights three behaviors to avoid during the potentially rocky road ahead.

Market volatility is likely to pick up next month for a number of reasons, including increasing investor anxiety ahead of the Federal Reserve’s September meeting.

I’ve already covered how investors can potentially prepare their portfolios for the bumpy road ahead. But many investors may also want to think about how to prepare their investing behavior for more volatility.


As Nelli Oster, an investment strategist on my team, recently wrote in a piece on Seeking Alpha, “3 Behavioral Biases to Watch Out for When Volatility is Back,” it can be hard to invest rationally when markets are volatile. The uncertainty associated with noisy returns data can aggravate certain investing-related psychological judgment errors.

In particular, as Nelli writes, investors may be prone to three bad investing behaviors during periods of higher market volatility.

1. Blindly following others when it comes to making investment decisions.When uncertainty is high, as it is when markets are volatile, investors are more prone to copy the positions of other market participants, who they feel may have better quality information. This kind of behavior can lead to falling victim to market bubbles and crashes.

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