Human beings have an astounding ability for self-deception when it comes to our own money. We tend to rationalize our fears with logical sounding arguments. These arguments are often elaborate, short-term excuses used to justify behavior that runs counter to long-term interests.
Below is a compilation of the five “greatest hits” of excuses we commonly hear:
1) “I just want to wait till things become clearer.”
It’s understandable to feel unnerved by volatile markets. But waiting for volatility to “clear” before investing often results in missing the return that compensates investors for taking calculated risks.
2) “I just can’t take the risk anymore.”
By focusing exclusively on the risk of losing money and paying a premium for safety, most investors are unaware of the risk tradeoff they are making in the form of inflation and longevity risk. With too much of either, investors can just as easily end up with insufficient funds for retirement.
3) “I don’t care about capital gains. I just need the income.”
Income is fine. But making income your sole focus can lead you down a dangerous road. Just ask anyone who held high-yield bonds back in 2008. The purpose of all investments is to acquire gain – the form of cash flow is less important than the size of wealth. Prudent investors strive to maximize return within an acceptable level of risk, regardless of whether it stems from interest, dividends or capital gains.
4) “But this stock/fund/strategy has been good to me.”
We all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than originally intended.
5) “But the newspaper/TV/my uncle said…”
Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually already reacted and moved on to worrying about something else.
The same goes for the “armchair experts,” many who recycle stuff they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes your circumstances into account.
When all is said and done, we are all apt to pull the wool over our own eyes from time to time. But, as your independent advisors, one of our most important responsibilities is holding you to the promises you made to yourself in your most lucid moments. While clients undoubtedly tire of hearing us tell them to “stay the course,” hearing that message again and again has proven to be valuable.