Your Brain Hates Your Portfolio!
Mental constructs that could hurt your investments and your wealth
By: Robert DeVries
Do any of the statements above look familiar? Have you ever thought them? Each of those thoughts and a few more below, could lead you to poor decision making about your investments and wealth. Below, we cover three common mental constructs that could be a roadblock, and strategies to overcome them. In my next blog, we’ll cover three more.
Yes, you are smart, and it has gotten you very far. But so are the millions of participants who trade in the stock market every day. There are over 80 million trades on a given day, most with intelligent investors and research supporting their viewpoint.
What’s happening: An illusion of control. Hard work and intelligence equals success elsewhere in life, why not in the stock market. Market efficiency makes it extremely difficult to pick winners, either individual stocks or investment managers.
What you should do: Control investment costs by using low cost enhanced index funds and skip the expense of trying to find winners.
Guess what? You’ve already lost money. What you’ve paid is irrelevant to the prospects for that investment.
What’s happening: Anchoring. You are creating a mental anchor at the price at which you purchased the investment. You also think if you never sell at a loss, you’ll never lose money.
What you should do: Ask yourself two relevant questions: Is my capital better employed elsewhere and, Can I save on taxes by recognizing the loss?
Believe it or not, the stock or bond market do not know when you invest, but we hear this way of thinking often. You remember more clearly the times when you’ve invested and lost money soon thereafter. You may also be susceptible to a fear of missing out, so you only invest when you hear everyone talking about making money in a particular investment and get in at a high price.
What’s happening: Confirmation bias. We tend to remember events that prove our way of thinking. Since the market has an upward trend over long periods of time, you might forget about the months of slow gains but remember clearly the sharp drop after you’ve invested.
What you should do: Invest capital appropriately toward your goals, matching your time frame for investment with the risk associated with those investments. For example, if you have only 12 months before you need to meet an obligation, you would not want to invest in a 100% equity portfolio. Rather, equity investments should be made when the time frame is significantly longer.
FirstWave Financial can help you work through these thoughts. For more, please call our wealth services firm in Satellite Beach, FL – Melbourne/Brevard area at (321) 773-7773 to schedule a complimentary consultation or visit us at www.firstwavefinancial.com.
You should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of the FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.