Had you been adequately diversified or well-versed with the potential risks of these investments, you may not have been prompted to sell at the wrong time. The ideal portfolio is one that maximizes the potential returns for a given level of risk tolerance. Weeks like this one should help define where your risk tolerance actually is and help you design a portfolio that will allow you to sleep nights. What follows are 10 lessons investors can draw from one of the most volatile weeks in the market. Running with the herd Ah, the old saw about chasing performance, one of those enduring chestnuts of conventional wisdom that get's pulled out every time the market goes a little witchy.
Problem is, like most dog-eared bits of conventional wisdom, there's a large kernel of truth in it.
Momentum exerts a magnetic effect on investors, holding out the lure of easy riches. We're hard-wired to think that it's easier to make money investing in stocks that are rising quickly than in stocks that are currently falling, or simply languishing. It's also often a bad way to invest. While fleet-footed investors may be able to hop on and off the hot stocks and come out ahead, by the time a firm trend is established in the minds of most investors, the easy money has been made and they're in danger of buying at the top. Of course, it'd be foolhardy to exclude any investment simply because it's done well.