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Rationally speaking, the time to jump into the stock markets was any point in 2009 or even 2010.

And yet, we had a big surge of money last month into mutual funds that invest in the stock markets. Apparently, a lot of people don't feel comfortable about buying stocks until the markets have already gone way up.

Your brain and your gut can push you in different directions when making financial decisions. Which is right? Let's just say that your best approach is to take the most rational approach you can live with emotionally.

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No question, the brain gets shortchanged too often when people make decisions about money. An entire academic field, behavioural finance, has emerged to study why people keep hurting themselves with choices that defy proven wisdom.

One explanation is that people have a tendency to think simplistically, even emotionally, about financial matters. Vancouver money manager Adrian Mastracci has gathered up some examples of what he calls preset biases that undermine logical investing. An example is direction bias, where investors look at the short-term trend on the markets and assume it will continue.

There's also confirmation bias, where people only latch onto information that confirms views or feelings they already have and ignore contradicting arguments.

If you were scared away from stocks after the 2008-09 crash, you've had more than enough commentary in the past two years to support your gut feeling that the markets are vulnerable to another big decline. Should you allow yourself to be talked back into the stock markets at this late date?

My take is that you should consider taking a series of small, gradual steps back into the market, but that may be a rational approach you cannot live with emotionally. A more comfortable choice might be to avoid stocks and invest instead in guaranteed investment certificates.

Accountant David Trahair has argued for this approach in his book Enough Bull: How to Retire Well Without the Stock Market, Mutual Funds, or Even an Investment Adviser. But right now, the long-term results from stocks suggest that using GICs exclusively is a second-best choice to a diversified portfolio with some stock market exposure.

GIC-only types will probably have to save more than people who tap into the greater growth potential of stocks, and they'll have to live in frustration at how low today's interest rates are. But they may end up being more comfortable with their investments, and thus more likely to stay on track.

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That's huge. Being talked into the stock market and then selling after a big plunge is worse than slow, steady conservative investing.

This brings us to a financial truth that isn't much talked about: The savviest decision isn't the right one if it causes you to be miserable or to do something dumb with your money. The livability of investing decisions matters as much as the extent to which they mean the best possible returns or lowest costs.

Even Mr. Mastracci, an investing pro, recognizes that the optimum approach for investors isn't always ideal. "Most things about investing are supposed to be logical, but it's difficult to make the logical decision at times," he said.

Balanced mutual funds are an example of how livability can be an important factor in making financial choices. They're a product designed for investors whose emotions - fear of the stock market - outweigh the rational view that you can get lower fees and a higher level of flexibility by investing in separate equity and bond funds. Experienced investors scoff at balanced funds, but they serve a need in providing a way for timid investors to diversify into stocks and thus pump up their potential returns.

Fixed-rate mortgages are an area where the livable choice probably won't be the cheapest. Studies have shown that variable-rate mortgages have been the better deal most of the time, and right now they're far cheaper than fixed-rate mortgages. But if you're worried about your ability to juggle higher mortgage payments with other expenses down the road, a fixed rate can make sense.

If you find that all your financial decision-making leans toward the cautious side after you balance emotions and rationality, then consider some diversification. If GICs are the pillar of your investments, maybe your mortgage could go variable-rate. If you're a highly aggressive investor, keep some money safe in a high-interest savings account. "Investing is never 100-per-cent logical," Mr. Mastracci said. "Just like the markets are never 100-per-cent rational."

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Rational Investing Goes Out The Window

Adrian Mastracci, portfolio manager at KCM Wealth Management in Vancouver, created this list of biases that sabotage rational investing:

1. Overconfidence bias: Thinking that we know more about an investment topic than we actually do. Can lead to quick decisions that we later regret such as committing too much money to a "surefire" stock.

2. Home bias: Americans have too much of the portfolio in U.S. stocks. Asians invest heavily in Asian companies. Europeans load up on their home country stocks. Similarly, Canadians have too much invested in Canada.

3. Recency bias: Your next investment decision is likely influenced by your last trade. You are more receptive to investing if you just realized a gain, versus having realized a loss.

4. Confirmation bias: The desire to find information that agrees with our existing view. Then we ignore all the other data that contradict.

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5. Direction bias: Research shows that if investors see two consecutive "up" days in the market, they assume that the third day will also be an "up" day and invest accordingly. Similarly, two "down" days produce the expectation of a third "down" day. These are only our expectations and have nothing to do with market reality.

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