3 Strategies to Overcome Our Flawed Investment Psychology – By Money Viking Greg
What a wild week in the market, like a crazy roller coaster! The field of investment psychology comes out with more and more evidence every year that proves we suck at investing and managing finances in general. The old models assumed that people behaved in their own self-interest. Nothing seems to be farther from the truth. People act against their long term interests every day. Here are a couple psychological pitfalls and ways to avoid becoming part of the Borg:
1. Loss of Control – Embrace it
We lack control of many aspects of investing. You have no control over the management and operations of a company. You have no control over where the economy goes. Humans want control because it makes us feel more secure in an uncertain world. But the illusion of control can lead to some bad investment decisions and outcomes. People that fall into this tend to watch their investments too much or make trades too often on impulse.
SOLUTION: For me, this means having a balanced all weather portfolio in a low cost index fund arrangement and trying not to mess with it or touch it. After the allocation has been set to my personal risk tolerance level, set it and forget it. Also keep in mind that when the stock market goes down, that is an opportunity to buy equities at a discount through dollar cost averaging. It is also about making strategic options plays like Jerry. These are defined risk plays based on probabilities.
2. Fuzzy Memories – Move forward with a sound strategy for today and tomorrow
Fleetwood Mac: “Don’t stop thinking about tomorrow, don’t stop, it’ll soon be here, It’ll be, better than before, Yesterday’s gone, yesterday gone.”
We tend to obsess over our stock losses and do the whole “I should have done this” stuff. I should have bought Google, Facebook, etc. This effects our self-perception as “good investors” or good with money management.
SOLUTION: The reality is that you probably did the best you could at that particular point in life. And there is nothing that can be different except your perception. Move forward and take action today to create a solid and sound plan and execute it.
3. Herding & The Media Noise
It is impossible to know and understand the thousands of stocks in the world. It is a huge effort and probably takes years of effort. I would never attempt it and consider individual stock picks akin to “having fun” and somewhat gambling. I would limit this kind of action. None of us really have the time it takes to make a serious run at this. That said, you will be bombarded with 24 hours of sensational news coverage regarding stocks and the market.
SOLUTION: Most experts say to tune it out and see most media for what it really is: entertainment meant to sell you advertising. Just know this going in. Set up a sound consistent strategy and stay the course or correct after meeting with a fiduciary professional.
Avoid becoming one of the Borg and understand your own investing psychology so you are prepared for maximum success.
*None of this information is advice for any particular person. Please consult a fiduciary financial professional.