How To Keep Emotion At Bay

Through the wonders of modern technology, it is simpler than ever to employ a systematic, proven approach to investing. But, as Chuck Jaffe notes in a recent MarketWatch column, investors need to be careful to keep emotion at bay when using systematic approaches.

“All too often, investors believe they have found that prized vessel to prosperity — right up to the point where the system stumbles or fails, or where it turns up a ‘buy’ signal on an issue that the investor would rather turn up their nose at,” Jaffe writes. “That first crisis of confidence can throw the whole process into question.”

Having a good systematic approach is thus just the first step, Jaffe says. He talks to several strategists about how investors can keep emotion from derailing such an approach, including partner Justin Carbonneau. One thing investors need to do, Carbonneau says, is realize that no system will be right all the time — and understand that you don’t need to be perfect to make big profits. “No strategy is perfect,” Carbonneau said, “but if you bat 50% to 55% winning picks within a model/system, you can do pretty well over time.” He points to’s Benjamin Graham-inspired portfolio as an example. The portfolio has returned nearly 14% per year since its mid-2003 inception vs. 4.3% for the S&P 500, and it has done so by being accurate — that is, making money — on 57% of its picks.

Another key, Jaffe notes, is keeping focused on the long term, not on short-term results. Carbonneau says that’s a big problem. “We know that most investors are plagued by recency bias and they weigh recent performance more than long-term performance.,” he says. “That is the exact opposite of what they should be doing.”

Jaffe also says systematic investors should make sure they are well diversified; commit to a system and stick with it; and be honest about their downside risk tolerance.