Nofsinger

Psychology of Investments

Nofsinger speaks about the risk of portfolios and the risks that people take when developing their portfolio. Nofsinger says, there are three things that an investor must look at when he or she is forming a portfolio. The first thing an investor should look at is their expected return and the second is the level of risk. The third thing the investor should look at is the correlations of how the investments will interact with each other (Nofsinger, 53). Following this will make since and will reduce risk but it is not what investors do. What many investors do is pick stocks, attempting to mimic a buffet (Nofsinger, 54). I am personally guilty of this, what I have been doing is I go into Yahoo! and looking under the industries to find interesting stocks and purchase them. I do my research but I never look at the stock at how it will affect the correlation of the entire portfolio. I feel it has hurt me because it seems when the market is down my portfolio is very much down and when the market is up my portfolio greatly increases. As Nofsinger mentions, maybe if we were to invest into commodities or real estate our portfolio would correlate better with the market. This however does not seem normal to investors by investing into a high risk investment like commodities into your portfolio to reduce risk. Peter Lynch and Nofsinger both believe that you should never put all your eggs in one investment (Nofsinger, 61). Statistics have shown that 15% of households own only a total of four stocks for their portfolio. This is an example of people being over confident, not doing their research and underestimating the risks of the market.

People are irrational and overconfident when it comes to investments and daily life choices. Nofsinger mentions a study that was done for college students about their driving abilitys. 82% of the college students felt that they were above the average driver (Nofsinger, 10). We all know that this is not true as...