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By Jason Stipp | 06-17-2010 02:07 PM

Keeping Your Worst Instincts in Check

Behavioral risk doesn't have to undermine your portfolio plan, says Morningstar's Christine Benz.

Jason Stipp: I'm Jason Stipp for Morningstar. We're wrapping up Risk Control Week on Morningstar.com. And this week, we talked a lot about measures of risks, things like volatility, we talked about the Morningstar Risk Rating, we were talking about risks that can happen when you are trading ETFs, we mentioned leverage risks, we even talked about systemic risks. But there's really this whole other set of risks out there that's difficult to capture with the data point.

Here with me to talk about that and what you can do to manage it is Morningstar's Christine Benz. She's director of personal finance for Morningstar.com. Thanks for being here, Christine.

Christine Benz: Jason, nice to be here.

Stipp: So we touched on this in a lot of different places this week, and I think it's one of the more interesting concepts of risks that you really don't hear about that much. You're used to hearing about the statistics, but what is one of the biggest risk factors that's not being measured out there?

Benz: Well, it's behavioral risk and it's the chance that you'll undermine your own returns by doing stupid things with your investments. We spend a lot of time talking about how to find good investments and think about things like low expense ratios and long manager tenures and company quality and so forth.

Well, it turns out the best investments might be investments that you won't do stupid things with or you won't be inclined to make bad timing decisions with. So, I think that this is a risk that investors really need to stay tuned to.

Stipp: So, they can at times be their own worst enemy is basically what your saying?

Benz: They can, and we have a statistic called investor returns for mutual funds and what we see is that consistently investors undermine their own returns with bad timing. So they buy high and they sell low.

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