Financially Speaking Podcast

Insanity
Published on October 8, 2014
The often quoted definition of insanity is when we do something over and over again expecting different results. A recent Wall St. Journal article pointed out the three mistakes that investors make over and over again. After observing human behavior toward financial decisions for over thirty-four years, I was struck by the fact that the list never changes. Investors keep making bad investment decisions.
First on the list was that investors incorrectly predict their future emotions. When the market is going our way and we are getting wealthier, we feel like we can weather any storm. But the reality is that fear is a very strong emotion and we feel the pain of loss twice as much as we enjoy the feeling of getting wealthier. It is tough to weather market downturns, but the data proves that we should do just that.
Second, investors fail to realize how common volatility is. The article mentions that the average spread between the best and worst stock returns is 23%. That is a bracing headwind for someone to has owned only bank CDs. A correction of 10% loss is very common-about once a year. We haven’t had a correction for some time, so investors should expect a correction in stocks. When it happens just keep telling yourself “This is not unexpected; it happens all the time.”
Last on the list is trying to forecast what stocks will do next. I am puzzled by the fact that investors continue to believe the predictions of ‘experts’ on television, in books and papers. Nobody can accurately predict the future of anything, much less than the stock market. “Analyst are terribly good at telling us what has just happened but little use in telling us what is going to happen in the future”.
So what’s the best prescription for Investor Insanity? Develop a long-term investment plan. Stay invested. Rebalance your portfolio. When we understand this, we can make it through the next correction just fine.
Tags: investments, investment decisions, investor fear, investing judgement
Archives
- March 2021
- January 2021
- December 2020
- October 2020
- September 2020
- August 2020
- June 2020
- April 2020
- March 2020
- February 2020
- December 2019
- November 2019
- October 2019
- July 2019
- May 2019
- February 2019
- October 2018
- June 2018
- April 2018
- March 2018
- February 2018
- January 2018
- September 2016
- March 2016
- February 2016
- January 2016
- November 2015
- October 2015
- September 2015
- August 2015
- June 2015
- May 2015
- November 2014
- October 2014
- August 2014
- July 2014
- June 2014
- May 2014
- March 2014
- February 2014
- November 2013
- August 2013
- July 2013
- May 2013
- February 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- April 2011
- December -0001