No one can control exactly how an investment will perform. And it doesn’t matter how smart an investor fancies oneself: no one can control the total market.
Why is it important to recognize this?
Because feeling a lack of control can lead impulsive & emotional investing decisions. The biggest risk to our market success may not be market fluctuations themselves, but rather our reaction to them.
Having a front-row seat to watching how people make money choices, I am convicted of this: the most dominant determinant of lifetime investment outcomes isn’t investment performance. It’s investor behavior.
Often, whenever folks bring me their statements and pour out to me the story of their money, I see this axiom proven time & time again in heart-breaking fashion.
I'm convinced that by identifying and understanding emotional investing behaviors, it gives us a better chance to avoid these kinds of mistakes going forward. Here are a few of the most common ones I've seen:
1. Trying to time the market. While it can be tempting to move toward the sidelines and wait for things to get better, it's nearly impossible to successfully predict when to exit & when to re-enter the market. When investors try to do this anyway -- buying when they feel good & selling when they feel bad -- the effect on total return can be dramatic.
It’s not unlike successful athletes: successful investors tend to stick with it. In order to achieve successful outcomes, it's important to stay in the game & not be darting back and forth from the sidelines.
2. Chasing performance. As long as there has been money to invest, there have been so-called "hot investments" that tantalize investors. It doesn’t matter if we’re talking about stocks, or property, or wildcat drilling for oil. Folks love a good story & feeling like they’re getting in on the ground floor of something special.
It’s this impulse for chasing a “hot investment” that often leads folks to sell what's out of favor in order to buy what just did well. Essentially: this impulse leads people to selling low to buy high. Does this sound like a recipe for successful investing outcomes? Ultimately, different sectors tend to underperform and outperform at different times, which is why diversification is so important.
I often coach clients to understand that we don’t have to take on huge risks to achieve satisfying gains. There are a host of tried and true investment options that give us a great opportunity to achieve successful outcomes time & time again. Wise is the man or woman who allocates their money in such a way that they can sleep well at night!
3. Focusing on the short-term. For example, many investors sold in 2008 because the market had fallen from an all-time high. Little did they know the new all-time highs the market (as measured by the S&P 500 index) would be setting just five years later, and every year after that through the end of the decade.
We want to train ourselves to be long-term investors. I think it helps to know where we get the word “invest” from. Comes from the Latin word Investire, which means “to wear the clothes of.” It means you’re a fan! You’re wearing the jersey of the business(es) you invest in. You’re not about to flip the jersey if they experience a small losing streak. No, you’ve taken on the spirit of the business(es) you’re investing in. Isn’t that the way we want to deal with what amounts to the sum total of what we’ve labored for? What’s precious to us?
So we want to train our minds to think as long-term investors.
I like to think of it in the same terms as planting an oak tree: one day's progress shows nothing, a few years' progress shows a little, ten years shows something big, and fifty years shows something absolutely magnificent!
In saying all this it’s important to recognize that emotion isn’t always bad. Being passionate & excited about investing is great! However the type of emotions that hinder are often reactive emotions. They cause us to make poor decisions based on what just happened. Avoiding these pitfalls and replacing them with sound investing strategies can take you a long way.