Make Your Brain Listen to Financial Gurus -- Not Your Fear or Greed

Last Updated Apr 29, 2009 3:17 PM EDT

For an example of how even smart investors let their emotions overwhelm their brains, you need go no further than my local financial radio guru.

This investment expert, Tom Marron on KVOR in Colorado Springs, told his audience recently that he advised his mother to sell all of her stock portfolio after it had lost 60 percent of its value. Otherwise, he stated, she would be financially dependent upon him.

And much like campfire stories that are told solely for the fear factor, this guru -- whose "proactive" style seems to consistently call the market wrong -- went on to describe the events of the Great Depression, and ominously predicted that more bad news and market declines were imminent.

Taking a step back
Everything this radio expert said struck a chord with my emotional mindset that's been telling me to bail out of the market now. On the other hand, my logical mind was asking why this guru had his mother in the stock market in the first place.

The stock market has always been risky, and I've consistently advised people not to take risks they don't need to take. If Marron's mother had built a nest egg that that was sufficient to support her lifestyle for her remaining years, she had no need to risk it in the stock market. Instead, she lost 60 percent of her savings -- faring worse than the overall market -- and only then did her son tell her to jump ship.

Lessons learned
I try not to be judgmental. But advising his mother to take risks she didn't need to take, and then advising her to bail after she has lost 60 percent of her nest egg so that she won't be financially dependent upon him, is just unconscionable. I hope Marron wasn't counting on a "Best Son in America" award.

A better approach might have been to help his mother years ago to carve out some safe money that would support her lifestyle no matter what the stock market did. He could have explained to her that the market has always been quite risky -- even over periods as long as ten years -- and that trying to time the market only increases risk and decreases return. Of course, that's primarily because investors seem to embrace risk-taking in up markets and then come down with risk allergies when the market is down and talk turns to economic depression.

So the next time you hear an investment guru giving you advice on what to do with your nest egg, don't act immediately. Ask yourself if your guru is actually trying to juxtapose past market conditions with the present one. Is his advice relevant today, or relevant only if you had a time machine?

Do what Jon Stewart did with Jim Cramer and look at this guru's track record. A simple Google search might uncover some past forecasts that didn't work out so well. All of these experts can appeal to your emotional brain, so be sure your logical brain is on board before you jump in.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.