|
Just as with raising children or in one's career, "success" with personal investing is in the eye of the beholder. Here are some common psychological obstacles that may keep you from fully realizing your financial goals and some tips and advice for overcoming those obstacles on the road to investing success.
Trusting authority
Some investors assume that an advisor is competent and ethical if she has a lofty title (financial consultant, vice-president, and so on), dresses well, and works in a snazzy office. Such accessories are often indicators of salespeople — not objective advisors — who recommend investments that will earn them big commissions — commissions that come out of your investment dollars.
Additionally, if you overtrust an advisor, you may not research and monitor your investments as carefully as you should. Figuring that Mr. Vice-President is an expert, some investors go along without ever questioning his advice or watching what's going on with their investments.
You should also question authority elsewhere in the investment business. Too many investors blindly follow analysts' stock recommendations without considering the many conflicts of interest that such brokerage firm employees have. Brokerage analysts are often cheerleaders for buying various companies' stock because their firms are courting the business of new stock and bond issuance of the same companies. And as the highly publicized accounting scandals at firms like Enron and WorldCom have highlighted, just because a big-name accounting firm has blessed a company's financial statements doesn't make them accurate or even close to accurate.
 | You can't possibly evaluate the competence and agenda of someone you hire until you understand the lay of the land. You can't possibly know for sure that an analyst's report or a professional service firm's recommendation or approval of a company is worth the paper it's printed upon. Read good publications on the topic to master the jargon and how to evaluate investments. Seek independent second opinions before you act on someone's recommendations. |
Getting swept up by euphoria
Feeling strength and safety in numbers, some investors are lured into buying hot stocks and sectors (for example, industries like technology, biotechnology, retail, and so on) after major price increases. Psychologically, it's reassuring to buy into something that's going up and gaining accolades. The obvious danger with this practice is buying into investments selling at inflated prices that too soon deflate.
In the U.S. stock market by the late 1990s, investors were getting spoiled with gains year after year in excess of the historic average annual return of 9 to 10 percent. Numerous surveys conducted during this period showed that many investors expected to earn annual returns in the range of 15 to 20 percent annually, nearly double the historic average. As always happens, though, following a period of excessively high returns such as those of the 1990s, returns were below average in the subsequent period beginning in 2000.
| Develop an overall allocation among various investments (especially diversified mutual funds) and don't make knee-jerk decisions to change your allocation based upon what the latest hot sectors are. If anything, de-emphasize or avoid stocks and sectors that are at the top of the performance charts. Think back to the last time you went bargain shopping for a consumer item — you looked for value, not high prices. |
Being overconfident
Newsletters, books, and even some financial periodicals lead investors to believe that you can be the next Peter Lynch or Warren Buffett if you follow a simple stock-picking system. The advent of the Internet and online trading capabilities has spawned a whole new generation of short-term (sometimes even same-day) traders.
| If you have the speculative bug, earmark a small portion of your portfolio (no more than 20 percent) for more aggressive investments. If overtrading is a problem, seek out Gamblers Anonymous. |
Throwing in the towel when things look bleak
For inexperienced or nervous investors, it's tempting to bail out when it appears that an investment is not always going to be profitable and enjoyable. Some investors dump falling investments precisely at the times when they should be doing the reverse — buying more. Whenever the U.S. stock market drops more than a few percentage points in a short period, it attracts a lot of attention, which then leads to concern, anxiety, and, in some cases, panic.
Investing always involves uncertainty. Many people forget this, especially during good economic times like Americans enjoyed in the late 1990s. History has repeatedly proven, however, that continuing to buy stocks during down markets increases your long-term returns. The worst thing that you can do in a slumping market is to throw in the towel.
| Investors who are unable to withstand the volatility of riskier growth-oriented investments, such as stocks, may be better off not investing in such vehicles to begin with. Examining your returns over longer periods helps you keep the proper perspective. If a short-term downdraft in your investments depresses you, avoid tracking your investment values closely. Also, consider investing in highly diversified, less-volatile funds that hold stocks worldwide as well as bonds. |
Investing too much to quit
Although some investors realize that they can't withstand losses and sell at the first signs of trouble, other investors find that selling a losing investment is so painful and unpleasant that they continue to hold a poorly performing investment, despite the investment's poor future prospects.
| Analyze your lagging investments to identify why they perform poorly. If a given investment is down because similar ones are also in decline, hold on to it. However, if something is inherently wrong with the investment — such as high fees or poor management — make taking the loss more palatable by remembering two things: |
- If your investment is a non-retirement account investment, selling at a loss helps reduce your income taxes.
- Consider the "opportunity cost" of continuing to keep your money in a lousy investment — that is, what returns can you get in the future if you switch to a "better" investment?
Being unclear about your goals
Investing is more complicated than simply setting your financial goals and choosing solid investments to help you achieve them. Awareness and understanding of the less tangible issues can maximize your chances for investing success.
| In addition to considering your goals in a traditional sense (when do you want to retire, how much of your kids' college costs do you want to pay) before you invest, you should also consider what you want and don't want to get from the investment process. Do you treat investing as a hobby or simply as another one of life's tasks, such as maintaining your home? Do you enjoy the intellectual challenge of picking your own stocks? Don't just ponder these questions on your own; discuss them with family members, too — after all, you're all going to have to live with your decisions and investment results. |
Ignoring your real financial problems
Plenty of high-income earners have little to invest. Some of these people have high interest debt outstanding on credit cards and auto loans yet spend endless hours researching and tracking investments.
Many people also built significant personal wealth despite having modest-paying jobs. The difference: the ability to live within your means.
If you don't earn a high income, you may be tempted to think that you can't save. Even if you are a high-income earner, you may think that you can hit an investment home run to accomplish your goals, or that you can save more if you can bump up your income. This way of thinking justifies spending most of what you earn and saving little now. Investing is far more exciting than examining your spending and making cutbacks.
|
