“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” -Jason Zweig.
Fear and greed continue to drive investors decisions more so than logic and long term resolve. The S&P 500 Index galloped up about 13% from the lows of February while at the same time the VIX (fear index) fell down about 50% since it’s peak during the same time frame.
Many people of all ages are getting a bit impatient with domestic and global markets trading sideways the past coupe of years, along with interest rates still trending near zero.
Instead of exercising greater caution and patience in the later- stages of the current bull market, many investors who claim they are risk adverse are looking for a new “silver bullet” solution to help advance their money.
While we cannot overemphasize to investors to follow the KISS principal (keep it simple!), the following are our top 3 critical behavioral finance & investing mistakes to avoid.
1. Not reading the fine-print: Don’t be fooled into purchasing complex nontraditional investment or insurance -based products that promise high income and or returns as a “stock market alternative” combined with certain “guarantees,” without first reading the prospectus and fully understanding the commissions, expenses, liquidity and risks up front.
In the aftermath of today’s post-recession economy combined with a whipsawed stock market, many fearful investors are blindly looking to substitute stock market risks – for other risks they clearly do not understand.
Not reading the “fine-print” of an investment product would be like taking eye-medication without first reading the directions and noting any possible side-effects. We always remind investors that it is as important to understand the return “of” your money as the return “on” your money.
While fancy sounding products like mortgage notes, structured settlements, viatical settlements, indexed CD’s and indexed annuities are pitched with phrases like “guaranteed income” or “market hedging,” consider that there really is no such thing as a free lunch.
Note that many of these products which are “sold” by brokers (more so than being purchased) have “Investor Alerts” on the FINRA and SEC websites. They state that “these alerts will help investors understand the costs as well as the potentially significant risks of these transactions.”
2. Cocktail Party Recommendations: Don’t be greedy or fooled by a friend at a cocktail party who bragged about an “amazing stock pick” or other investment on which he (or she) made a “huge return” and that you are “missing the boat.”
Always remember that past returns do not dictate future performance, and that asset allocation matters inherently more than picking a “hot stock” or trying to time the market.
Typically, by the time you hear or read about a good investment, it is already overpriced and probably a good time to sell.
For example, many investors got onto the biotech-rush early last year right before the whole sector plummeted about -30% since July of 2015. While healthcare can be a great sector to utilize as part of your overall allocation, consider that biotech’s returns may be a bit more unpredictable since drug price “gouging” tactics came into light after “‘pharm-bro” Shkreli raised the price of an HIV drug by 5,500%.
Another example of a cocktail party investment catastrophe would have involved lighting up some cannabis stock investments. While it may be a “growth business” for the actual producers (no pun intended), most of the stocks in this sector have gone up in smoke. Literally. Since 2014, there has been about a -90% drop in the stock price of most of the companies associated with this industry.
3. Assuming Education Equals Investing Intellect: Don’t be a fool and assume because you attained a high level of education and work as a top-doctor, lawyer, CPA, CFO or as a high-tech engineer, that you are more qualified to make complex investment decisions and will better stomach roller coaster volatility more than other mere mortals.
Malcom Gladwell’s book “Outlier’s” continually mentions that it requires an enormous investment of time, experience and education in order to be considered an expert in any field- and that it takes roughly “ten thousand hours of practice” just to achieve mastery.
You may trick yourself into believing that you can invest better than an experienced financial professional, but in the end your investment strategy may look and feel more like putting chips down on different numbers and colors on a roulette table in Vegas.
No matter what you read or who you follow, consider that investment strategies from your neighbor to the great Warren Buffet may not apply to your own personal economy. The “Oracle of Omaha” continually warns “the average investor” from trying to emulate his strategy regarding IBM or any other stocks, adding that “most investors are likely better off buying an ETF.” This was after IBM tanked about -40% over the past three years.
You and your behavior may be your own worst enemy. Stick to what you know and hire a qualified financial professional and wealth management advisor to help guide you with your wealth planning and management goals before and after retirement.
We are here to help you get an “A” in financial literacy.
Managing wealth and selecting investments to help you meet and maintain a 30+ year retirement takes time, effort and planning. It should not involve a quick-impulse decision like picking out a restaurant on Trip Advisor – or utilizing a stock pick from a friend, neighbor or coworker.
Become a disciplined investor with your nest egg by developing and executing your own personal investment policy statement (IPS) that matches up to your age, goals risk tolerance and financial situation- and stick to it.
For more information on our firm or to request a complementary consultation please email [email protected] or call (561) 210-7887 today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Loss of principal may occur. No strategy assures a profit or protects against a loss. Investing involves risks, including possible loss of principal