Avoiding Money Mind Traps
We all love to watch our investments when we’re winning in the market and making money. The problem comes when we lose. The temptation to make rash decisions, whether in buying or selling investments, is the real enemy of investors.
Our behavior when we fall short of expected returns causes us real problems. Why does it seem losses count twice as much to us as gains?
Behavioral economists such as Daniel Kahneman say we act irrationally around our money or investments and take irrational actions often because we hold irrational expectations.
Markets go up and down. We often panic when the market falls and jump with irrational exuberance when it rises.
Do you recognize this pattern in yourself? Can you stop it? If you’re like most investors, no. You just get too emotionally involved in what’s happening in your portfolio.
We all look for the next really cool stock that guarantees good results. We all like to think that we’re rational in how we approach money and investments. Research shows the opposite.
The result? Often we move money into the next sure bet, and a year or two later wish we never made the move. Some tips to avoid this trap:
Let time pass. I have a rule once I make an investment decision: I make no changes for at least two weeks. In fact, I don’t even talk with anyone about the change for two weeks. If after that time the idea still seems good then – and only then – do I talk with others about my idea.
Hold the same true for your investments. If you want to make a major change, think about it for at least two weeks. If your idea still seems solid then, start talking about it with those you trust.
If you find agreement, move forward. If those you trust disagree with your move, look at their reasons and see if the disagreement makes sense. If it does, pause before changing your investments.
Be an investor, not a speculator. A speculator makes emotional decisions and moves, looking for a quick fix to a long-term investment problem.
Whiz-bang ideas rarely, if ever, work; just look at aggressively managed hedge funds that promised outsized returns. Over the past 10 years, hedge funds barely stayed up with inflation and the only outsized returns went to the funds’ sponsors.
I’m a big fan of Jack Bogle, founder of the Vanguard Group of mutual funds. Bogle started Vanguard believing that it’s almost impossible to beat the market and that it makes more sense to invest for the long-term and not churn your account. Those who do so win over the long-term.
“Intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course,” Bogle said in the New York Times in 2012. “And they won’t be foolish enough to think that they can consistently outsmart the market.”
Aren’t long-term wins what you really want?
When you hit with the urge to rush into the newest hot investment, stop, think and then think again. It’s your future. Look at what’s worked best.
Follow AdviceIQ on Twitter at @adviceiq.
Josh Patrick is a founding principal of Stage 2 Planning Partners in South Burlington, Vt. He contributes to the NY Times You're the Boss blog and works with owners of privately held businesses helping them create business and personal value. You can learn more about his Objective Review process at his website.
AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.