Don't let emotions tank your investments
Don’t let emotions tank your investments
What if I told you that you could avoid a common mistake that many investors make, one that could have cost anywhere from $2,000 to $6,500 of growth on a $10,000 investment over a 10 year period?
Judging by the number of otherwise intelligent people who already understand the common mistake yet make it anyway, it may not be such an easy error to avoid.
In response to a query on what it takes to be a successful investor, Warren Buffett said “Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing”
It is that simple, right? Free yourself from your emotions in order to buy low and sell high?
Because it’s your money
Throughout my career, I have met individuals who parrot the statistics highlighting the underperformance of many managed securities relative to their indices, yet surprisingly, it is these same individuals who seem to fall victim to their own emotions and further underperform the securities of their ire.
Emotion. That’s the reason. Well, that and overconfidence in their ability to manage their emotion when it comes to their own money.
When it’s your money it means so much more than numbers on paper. Your money represents the hours you’ve toiled to earn it. Days drawn out to weeks, added up to months, and eventually years spent doing the hard work in service of making the almighty buck.
Every stock market gyration and talking head on TV hastens the public to panic. Each imminent correction becomes a daily reminder that your nest egg sits perched precariously on the edge of a very high wall, think humpty dumpty, and it could all come crashing down in one ill-timed stock market dive.
An entire branch of financial planning is devoted to something called Behavioral Finance which investigates how emotions affect the performance of the average investor’s portfolio. To boil it down to just a few paragraphs (though I would encourage you to further research the field as it is incredibly fascinating), let’s briefly consider a few key points.
Research from Dalbar Inc., Morningstar, and a host of other firms shows that average investors suffer from a perceived confidence in their abilities to invest and achieve successful returns often underperforming the markets due to this overconfidence. As the number of trades these investors make increase, the degree of their own underperformance also increases. Translation: their own trading is what leads to their underperformance.
In addition to overconfidence in their own abilities, investors tend to ignore the following fine print in many investment proposals: past performance is not indicative of future results. The average investor just can’t help believing that an investment’s past performance can be extrapolated to create a reliable predictor of future returns.
The research shows that while I can tell you this, you won’t believe it. But I’ll try anyway, ready? Global markets change, asset classes frequently fall in and then right back out of favor, and ultimately past market returns cannot be relied upon to predict much.
When an investor believes that he or she has made a good investment, the pride in that investment decision can encourage the investor to harvest gains too early. The other side of that coin leaves some investors proud of their returns and unwilling to sell, thus suffering losses when the investment is no longer the right one to hold. Both of these responses speak to an investor’s emotional disregard of the fundamental benefits or detriments of the investment itself.
Equally detrimental to one’s returns is the emotional unwillingness to admit when a poor investment decision has been made. Even though all logic may point to the fact that the investment purchase boasts fewer prospects for growth than the markets themselves, the desire to avoid feeling regret can bring an investor to continue to hold that security. Yes, emotion can be a powerful thing.
What to do?
The problem with isolating an easy solution is that emotion, by definition, defies logic. The most surefire way to avoid the emotional decisions that can wreck your retirement plan is to cede responsibility of the management to someone else. Engaging the services of a professional planner or money manager, someone that has a stake in your portfolio’s performance but not the emotional attachment to the money, may be worth considering.
Anthony M. Conte is Managing Partner at Conte Wealth Advisors with offices in Camp Hill, Pennsylvania and Fort Myers, Florida. He has a Master’s Degree in Financial Services and the CERTIFIED FINANCIAL PLANNER ™ certification, and he welcomes your emails: firstname.lastname@example.org.
Registered Representative Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors, LLC are not affiliated.
The opinions expressed in this column are solely the writer’s and do not reflect the opinions of PennLive.com or The Patriot-News.
Before acting on any financial advice, readers should consider whether it is suitable for their circumstance and consider seeking advice from a financial or investment adviser.