STOCK MARKET VOLATILITY IS EMOTIONAL ROLLER-COASTER

There's a reason why the ups and downs of the stock market can leave you depressed.

It has to do with human behaviour. Investors value gains and losses differently. A loss has more significance to an investor than a gain of an equal amount.

For example, if for one month your portfolio increases in value for half the days and decreases in value by the same amount for the other half, then nothing has changed.

But emotionally you have suffered because the days your portfolio declines in value are difficult on you emotionally.

Understanding emotional behaviour has become an important part of understanding human behaviour when we invest. Prof. Daniel Kahneman, a psychology professor at Princeton University, won the Nobel Memorial Prize in Economic Sciences in 2002 for his contribution to behavioural economics.

His research includes the "loss aversion theory." That is the basis of what is described in this column.

How can this understanding assist us with investing?

We should appreciate that we are subject to emotional reactions when investing. It can prepare you for the times your nerves might be on edge during a volatile or declining market.

That won't necessarily dictate how you react during volatile times, but hopefully it would inform any decisions you make.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Only investment-related products and services are offered through Watson Securities of ACPI. Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com.