Tag Archives: Emotional Investing

The Psychology of Money

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“Wealth is what you don’t see. It’s the cars not bought, the diamonds not purchased, the watches not worn, the clothes forgone, and the first-class upgrade declined.” ~ Morgan Housel

Doing well with money and building wealth aren’t necessarily about what you know. It’s about your habits and how you behave. And behavior is hard to teach, even to really smart people, writes Morgan Housel in his book The Psychology of Money.

In the real world, people don’t make financial decisions on a financial spreadsheet. They make them at the family dinner table, or in a bar, where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together.

In The Psychology of Money, award-winning author Morgan Housel explored the strange ways people think about and behave around money. He teaches you how to make better sense of one of life’s most important topics.

Below are 15 important and life changing lessons and quotes from The Psychology of Money by Morgan Housel:

1. Money is a tool. It’s not an end in itself. “Controlling your time is the highest dividend money pays.”

2. Don’t let your emotions control your spending. Be mindful of the emotions that can drive you to overspend, and learn to control them.

3. Invest for the long term. The stock market will go up and down in the short term, but over the long term, it goes up. “Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds.”

4. Don’t try to time the market. No one can predict the future, so don’t try to guess when to buy and sell stocks. “The enemies of investing success are impatience and the illusion of control.”

5. Diversify your investments. Don’t put all your eggs in one basket. Spread your money across different asset classes to reduce your risk.

6. Don’t be afraid to take risks. But don’t be reckless either. “Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort.”

7. Pay yourself first. Make sure you save money for your future before you spend it on anything else. “The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today.’”

8. Live below your means. The less you spend, the more money you’ll have to save and invest. “Saving is the gap between your ego and your income.”

9. Don’t compare yourself to others. Everyone is on their own journey. Focus on your own financial goals and don’t worry about what others have. “Be nicer and less flashy. No one is impressed with your possessions as much as you are.”

10. Be patient. Building wealth takes time. Don’t expect to get rich quick. “Compounding works best when you can give a plan years or decades to grow.”

11. Be grateful. Appreciate what you have, both in terms of your financial situation and in your life in general.

12. Help others. One of the best ways to feel good about your money is to use it to help others.

13. Be kind to yourself. Everyone makes mistakes. Don’t beat yourself up if you make a financial mistake. Just learn from it and move on.

14. Never give up. The road to financial independence is long and winding, but it’s worth it. Keep working hard and never give up on your goals.

15. Money can’t buy happiness. But it can buy peace of mind and security. “Doing something you love on a schedule you can’t control can feel the same as doing something you hate.”

The Psychology of Money by Morgan Housel is a book about the emotional side of money. It’s about how our feelings about money can lead us to make bad decisions. It’s also about how to overcome these emotional biases and make better financial decisions.

Source:  Morgan Housel, The Psychology of Money

 

How to Beat the Market

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“You don’t add value by rehashing the consensus — that’s already discounted in markets. I don’t think anybody’s gonna pay you very much for that..” ~ Gary Shilling

Top financial forecaster Gary Shilling believes that to beat the market, you must go against the consensus—but not simply as a contrarian for its own sake.

Shilling suggests that you, as an investor, need to identify rare situations where the consensus is clearly wrong and a major trend is developing. When you spot such an opportunity, act decisively.

Shiller emphasizes that most people can’t consistently beat the market because, on average, the market reflects all available information. Only by being correct when others are not can you outperform the market.

Fear of Missing Out Investing

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Most new and seasoned investors make the same mistake with their money over and over:

They buy high out of greed and sell low out of fear.

At the top of the market, investors can’t buy fast enough. At the bottom, they can’t sell fast enough. And investors repeat that over and over until they’re broke.

Can you imagine doing this in any other setting? Imagine walking into an Audi dealership and saying, “I need a new A6.” The salesperson says, “Oh my gosh, you’re in luck, we just marked them up 30%.” And you say, “Awesome, I’ll take three!”

Investors are hardwired to get more of what gives us security and pleasure, and run away as fast as we can from things that cause pain. That behavior has kept people alive as a species. Mix that with investors desire to be in the herd, the feeling that there’s safety in numbers, and you get a pretty potent cocktail.

(FOMO – fear of missing out):  When everyone else is buying, it feels like if you don’t join them, you’re going to get eaten by the financial version of a saber-toothed tiger.

But it doesn’t take a genius to see that this behavior is terrible for individuals when it comes to investing.

Source:  Carl Richards, How fear and greed kill returns

Understanding the Emotions of Investing | Edward Jones

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“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch

No one can control the economy, the stock market or exactly know how an investment will perform in the short term. And that lack of control and certainly can lead to making poor (and many times, emotional) investing decisions – like chasing performance, not diversifying, or trying to time the market by moving into and out of the market (often at the wrong time).

While these reactions can be triggered by a desire to avoid risks (defined for our purposes as loss of capital), the results of these behaviors can pose the greatest risk of all — not reaching your long-term goals. In fact, the biggest risk may not be market fluctuations themselves; it’s our emotional reaction to these fluctuations and market volatility. That’s why it’s so important to have a financial advisor in your corner, helping you stay committed to your long term investment strategy.

Here are some common emotional investing behaviors that may derail your journey to reaching your long-term financial goals. By understanding the pitfalls of these behaviors, you can prevent making these investing mistakes in the future.

1. Heading to (or staying on) the sidelines

We’ve all seen the headlines: the economy’s slow recovery, the government’s budget deficit, market volatility. Prompted by what they perceive as bad news, some investors may try to “time the market” or sell investments just because of what they hear in the news – to move to the sidelines (and perceived safety) and wait until things get better. But it’s nearly impossible to correctly ‘time’ the market (predict when to get out and even more difficult to decide when to get back in), which often results in missing the best days – thereby severely affecting your performance And often, waiting until things get better means selling when prices are down and then buying back in when prices are higher – not a recipe for long-term success.

Other investors hold in too much cash because they want to avoid market risk. But not investing could actually increase your risk because you may not have enough growth in your portfolio to meet your short and long term financial goals or offset inflation (and loss of purchasing power).

2. Stay in the game and stay invested

Keep your focus on your long-term financial goals rather than on the ever-changing headlines, which could focus too much on the negative for dramatic effect.

If you begin to feel overwhelmed, talk with your financial advisor about your attitude toward risk and observe how you react to specific events. That way, you can work together to refine your goals and investment strategy, if needed.

3. Chasing performance

When the media raves about the latest “hot” investment or highlights “dramatic” declines in the market, some investors are tempted to chase the winners and sell the losers. This type of emotional response could be a recipe for underperformance because it results in buying high and selling low – not the recipe for a successful investment strategy.

4. Stay diversified

Having a diversified set of investments is more important than trying to find the next “hot” investment. When you have a portfolio made up of a variety of quality asset classes and investment types, success isn’t tied to one company or one type of investment. While diversification cannot guarantee a profit or protect against loss, it can help smooth out the ups and downs of the markets, providing the potential for a better long-term experience.

Financial experts recommend reviewing your portfolio with your financial advisor at least once a year to ensure it’s adequately diversified. Your financial advisor can also help you decide if a recent major lifestyle or goal change warrants a change to your strategy.

5. Focusing on the short term

Day-to-day fluctuations in an investment’s value may tempt some investors away from their long-term strategy. For example, some investors sold out in 2008 because their portfolio had fallen from an all-time high, even though their performance may still have been on track to meet their goals and well above where they initially started.

Decisions can also be influenced by how a situation is presented.

Take this example: “The Dow plummets 150 points” OR “the Dow declines 1%.” Both could describe the same situation, but the first sounds much worse. It’s these short-term movements, and how they’re presented by the financial entertainment media, that could lead you to make emotional short-term decisions.

6. Setting realistic expectations

Realizing that market declines, while unpleasant, are normal will help you set your own realistic expectations for investment performance. After all, the stock market averages one 10% correction every year, and over a 25-year retirement, you could experience an average of six to seven bear markets.

It’s important to measure performance as progress toward your long-term goals, not in day-to-day fluctuations. Your financial advisor can help you answer the question, “How am I doing?” and help provide the discipline you’ll need to stick with your long-term strategy and ignore short-term distractions.

Source: https://www.edwardjones.com/preparing-for-your-future/financial-education-resources/investing-emotions.html