For more than twenty years we’ve helped people make wise investment decisions, and plan for life changing events like retirement and aging.
In this article, we’re covering human nature and its impact on wise decisions around money, with investing as one facet. The more we become aware of our nature — what’s behind our decisions — the better we can accumulate wealth and enjoy the benefits of spending it on essentials and things we want.
Human nature is human nature, and it changes very slowly.
Today we are more rapidly informed than at any time but that doesn’t mean we are better informed nor better behaved. Our investing mistakes are not much different than South Seas investors in 1720 who were duped by their own convictions of easy money or falling victim to promises of Ponzi schemes like Charles Ponzi’s postal reply coupon scam in 1920, Bernie Madoff’s mutual fund scam in 2008, and Allen Stanford’s CD scam in 2009.
All of these scams promised high returns with little or no risk — achievements other investors could not get because they weren’t as special.
The problem we’re taking about today is that many people simply don’t know how to invest wisely. They fall victim to their hopes and behaviors — we’ll call them investing errors — and sacrifice the future they want. It happens more often than anyone cares to admit and you don’t have to be involved in a big scam to lose a substantial amount of money.
Consider these scenarios:
- Savvy marketers who play off your emotions: fear, greed, sadness, urgency and hopes for the future or longings for the past.
- Investment programs promising high returns with low risk, like making money flipping houses, that urge you to invest like the wealthy and buy into real estate investment trusts and live off secure dividends.
- Sad stories from friends, adult children, and other relatives who convince you to loan money or participate in questionable ventures.
- Your own personal biases like procrastination and status quo, and holding inherited securities from Grandma when it makes more sense to sell and following the crowd.
The Secret To Wise Investing Is Know Thy Self
- Secret 1: Know who you are
Understand your feelings about risk vs. the risk you can take.
- Secret 2: Think about the right issues
Know how much you want (goal), when you need it (timeline), the growth you’ll need (required return), and align your expectations (increase risk or adjust savings).
- Secret 3: Know your biases
Be aware of the biases that impact your investing decisions like losses, status quo, and overconfidence.
- Secret 4: Set your rules for engagement
Design an investment policy to guide your asset allocation and rebalancing, and manage your behavior in turbulent markets so you can avoid the most common mistakes many investors make.
Investing is simple but it’s not easy.
Just because you are smart and successful in your career doesn’t translate to successful investing. Financial literacy helps overcome investing errors but the benefits of literacy are limited by time, our ability to learn and retain, and that is limited by our age.
Middle age people commit fewer errors than younger or older people: young people lack financial literacy because they’ve never had it and older people lack financial literacy because they can no longer retain it.
If you’re interested in talking with one of our financial advisors, please reach out and contact us today. We’re ready, we’re available, and we’re looking forward to speaking with you!