Do You Want To Become A Better Investor? Then Focus On These Important Insights From Behavioral Finance
“Much (perhaps most) of the risk in investing comes not from the companies, institutions, or securities involved. It comes from the behavior of investors.” - Howard Marks
Are you looking to become a better investor? Then focus on these ten behavioral insights to increase the odds of your success:
Avoid Herd Behavior: “If everybody is thinking alike, then somebody isn't thinking.”― George S. Patton
The irony of investing is we typically want to invest when times are good (stocks are expensive), and want out when things go down (prices are attractive). Your investment philosophy should be aligned with your objectives, not your neighbors or what you heard on TV. Learn to march to the beat of your own drum.
Avoid Overtrading: “While the interests of the business are served by the aphorism 'Don't just stand there. Do something!' the interests of investors are served by an approach that is its diametrical opposite: 'Don't do something. Just stand there!’” - Jack Bogle
You do NOT need to check your accounts every day. Put money to work consistently in a low-cost, tax-efficient, index fund, manage your risk, trim profits, keep principle invested; Even if stock prices move randomly, you shouldn’t. One of the biggest expenses people pay is taxes. The more you trade, the more tax implications you incur (also keep in mind the bid vs. ask spread).
Don’t Be Afraid to Take A Loss: “The irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them.” – Daniel Crosby
Research shows that people are far more concerned about realizing losses than they are happy about realizing equivalent gains. The real risk is not that your investments will go down (they inevitably will at some point), it’s that you will outlive the money you have. You may feel that you need to hold onto a losing position, ‘it’ll eventually recover'. Don’t let your ego dictate your decisions, sell your losers.
There Will Always Be Something To Worry About: “The best way to deal with uncertainty without hiding in a bunker is to save like a pessimist and invest like an optimist.” – Morgan Housel
Focus on what you can control and stop worrying about the factors you can’t. When you feel hopeless, listen to Tom Hanks!
Think in probabilities, not absolutes. The longer you are invested in the market, the more likely you will make money, that’s a fact.
Be Honest With Yourself: “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” - Benjamin Graham
The best strategy for investing is one you’ll stick with, through the ups and the downs. Everyone thinks they can handle volatility, until they see their accounts go down 30-40%…
Use last year as a gauge on your tolerance for risk. Were you sick to your stomach seeing your accounts go down? Or were you comfortable knowing you were in this for the long run? Just staying invested, even if it’s not in 100% stocks, is still better than constantly going to 100% cash time and time again.
Don’t Chase: “Market timing can only be accomplished by liars… I do not know of anybody who has done it [market timing] successfully and consistently.” - Jack Bogle
I have no interest in the ‘get rich quick’ schemes. Be cautious with IPOs, avoid hot tips on the golf course, become a skeptic of terms like ‘always’ and ‘never’.
“You can only get poor quickly. To get rich, you will have to do it slowly, and you have to start now.” - Burton Malkiel
“There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” - Charles Kindleberger
Overconfidence: “Overconfidence is a very serious problem. If you don’t think it affects you, that’s probably because you’re overconfident.” – Carl Richards
Be humble enough to know you don’t know everything. Be open to change. Also, be cautious taking a victory lap, the markets will humble you real quick…
Investors tend to exaggerate their own skill and deny the role of luck. The outcome isn’t everything. You can be a moron, and still get it right/make money. Focus on your process, not just the outcome.
Stop Listening to Market Forecasters: “No one can predict with any certainty which way the next 1,000 points will be. Market fluctuations, while no means comfortable, are normal.” – Peter Lynch
No one can predict where the markets are headed, especially you… (read that again).
Many investors rely on market ‘experts’ and forecasters when making their investment decisions. Yet a study was done looking at 6,584 forecasts made by ‘gurus’ from 2005 - 2012. They were right 47% of the time, worse odds than a coin flip…
Learn to block out the noise and get busy living.
Be Cognizant of Your Biases: “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”– Jason Zweig
We are some f*ucked up individuals with a lot of passionate beliefs. These beliefs can drive our investment decisions. Reading articles that only agree with your beliefs (confirmation bias), making decisions based on short-term movements (recency bias), the ease of making no changes (status quo bias), etc.
Be aware that your beliefs may not make for the best investment choice…
Don’t Think Like A Spreadsheet: “You’re not a spreadsheet. You’re a person. A screwed up, emotional person.” - Morgan Housel
Just because investing/finance involves numbers does not mean you should think like a spreadsheet. Understand that you are going to make choices that may not be the best financial decision, and that’s ok.
Strive to create a life where you have the flexibility, freedom, and time to do what you want for as long as you want. A spreadsheet has no idea what you really want…
Our behaviors tend to dictate our investment success. Don’t be your own worst enemy.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
All investing includes risks, including fluctuating prices and loss of principal.