By: Larry MacDonald

I talked recently to Richard Deaves, a professor of finance with a specialization in behavioural finance. As mentioned in his book, he thinks investors should become do-it-yourselfers and adopt the passive-indexing approach (e.g. Couch Potato Portfolio). There are just too many behavioural traps such as overconfidence, performance chasing, and the like; passive investing cuts out a lot of them.

Deaves on the bear market: “I hear some advisors saying you should sell stocks if you are feeling apprehensive. I don’t agree. It’s a lousy time to cash out. It’s hard to image the markets going much lower. If you are young, there is a lot of time left to recover and get back on track. People in their mid-fifties or older who did not diversify properly may not, unfortunately, have time to recover fully. Be sure to pay attention to asset allocation.”

Recommended reading in behavioral finance area: “There is a good, easy-to-read survey book called Investment Madness: How Psychology Affects Your Investing . . . And What To Do About It, by John R. Nofsinger. I enjoyed reading it and many others will too,” said Deaves.

If you need help finding out what kind of investor you should be, you can go to Deaves’ investorgauge.com website and take his InvestorGauge Questionnaire, “a self-assessment tool for investors made up of 50 questions chosen according to the latest investment research.” It generates personalized reports on your investment knowledge, risk tolerance, investment personality and investment temperament. “Knowledge of these personal attributes will be very useful to determine the investment style that is right for you.”