Other people have an astounding facility for self-deception when it comes to their own investment decision-making. (If only if they were like us, wink wink). They tend to rationalize their own fears. So instead of just recognizing how they feel and reflecting on the thoughts that creates, they cut out the middle man and construct the façade of a logical-sounding argument over a vague feeling. These arguments are often elaborate, short-term excuses that they use to justify behavior that runs counter not only to their own long-term interests but ours. That is now being captured in the field of behavioral economics.
10 Investment Excuses
1. “I just want to wait till the investment clouds become clearer.” It’s understandable to feel unnerved by volatile markets. But waiting for volatility to “clear” before investing often results in missing the return that can accompany the risk.
2. “I just can’t take the investment risk anymore.” By focusing exclusively on the risk of losing money and paying a premium for safety, they can end up with insufficient funds for retirement. Avoiding risk can also mean missing an upside.
3. “I want to live today. Tomorrow can look after itself.” Often used to justify a reckless purchase, it’s not either-or. You can live today AND mind your savings. You just need to keep to your budget.
4. “I don’t care about capital gain. I just need the income.” Income is fine. But making income your sole focus can lead you down a dangerous road. Just ask anyone who recently invested in collateralized debt obligations.
5. “I want to get some of those investment losses back.” It’s human nature to be emotionally attached to past bets, even losing ones. But, as the song says, you have to know when to fold ’em.
6. “But this stock/ investment/strategy has been good to me.” They all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than you bargained for.
7. “But the newspaper investment section said …” Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually has reacted already and moved on to worrying about something else.
8. “The guy at the bar/my uncle/ my boss told me …” The world is full of investment experts, many who recycle stuff they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes your circumstances into account.
9. “I just want investment certainty.” Wanting confidence in your investments is fine. But certainty? You can spend a lot of money trying to insure yourself against every possible outcome. While it cannot guard against every risk or possible outcome, it’s cheaper to diversify your investments.
10. “I’m too busy to think about this.” They often try to control things they can’t change—like market and media noise—and neglect areas where our actions can make a difference—like the costs of investments. That’s worth the effort.
Given how easy it is to pull the wool over their own eyes, it can pay to seek independent advice from someone who understands their needs and circumstances and who holds them to the promises you made to yourself in your most lucid moments. Please forward this blog to them and ask them to send it to “Other People” they know. If you don’t have a CERTIFIED FINANCIAL PLANNER™ professional you are working with, please refer them to this blog or to our Free Financial Check-up. You can use the same link if you think it makes sense to get a second set of eyes on your investment decision-making.
Adapted from the OCTOBER 2012, Outside the Flags, “The Top Ten Money Excuses”, Jim Parker, Vice President, DFA Australia Limited Dimensional Fund Advisors’
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.