Psychology and the Secret of Investing Success

Recently, Dr. Daniel Crosby visited with Truepoint team members and clients to discuss his powerful “rules of investing.” Dr. Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. For those who were unable to attend, we wanted to share some of his compelling insights, which we found particularly relevant during these more volatile times.

Rule #1: You control what matters most

When it comes to our financial plans, we often focus on external events, becoming anxious and stressed about the Fed raising rates, the path of inflation, the invasion of a country, a new variant, or a new vaccine. Investors erroneously believe that it’s these events that have an outsized influence on their portfolio returns, but in fact, the factor that most determines our success is something that’s completely within our control. It’s our own behavior.

We incorrectly assume that to win at investing we need to correctly predict external events. In pushing ourselves to forecast the future, drop in and out of the market, chasing the hot opportunity and running away from the asset classes in freefall. But to succeed at investing we need to control the “controllables,” like staying the course, diversifying, and maintaining a long-term view.

The takeaway from decades of research on investors, asserts Dr. Crosby, is that people benefit when they work with a financial advisor, but not for the reasons you might think. It might seem that a good advisor’s primary value is to provide unique insights into the best investment opportunities. And while there may be some truth to that, it’s not the right reason to hire an advisor. A recent study by the Investment Funds Institute of Canada compared investors and found that, on average, investors who worked with financial advisors had nearly three times the net worth and four times the investable assets of those who did not. Their advisors did not have secret, insider knowledge about what stocks would go up during that time. Instead, they kept their clients from making a handful of small, yet harmful, mistakes.

Think back to March 2020, when the most sudden and fastest bear market of all time came crashing down. Most people believed markets would get much worse for much longer and that a bounce back would happen much more slowly than it did. But in April 2020, the S&P 500 returned over 12%, and by the end of the year, it had returned more than 18%. Investors who abandoned their positions during the early days of the pandemic missed out on much of that upswing and generated much lower returns than an investor who stayed the course and focused on the long term. An advisor can help you follow your plan and stay invested even during difficult times. They help their clients avoid those mistakes that undermine success.

Rule #2: Emotion is the enemy of good decision making

In addition, Dr. Crosby emphasized working with an advisor provides benefits beyond the dollars and cents. It also gives you peace of mind and helps you feel better prepared for retirement, for emergencies, and for pursuing your dreams. By taking your money worries off the table, a trusted advisor can holistically elevate your life. They can serve as an emotional guidepost and reinforce self-discipline, which is significantly more important for your long-term success than figuring out when the Fed will raise interest rates.

On the flip side, poor financial decisions are often the result of heightened and fleeting emotional states—the kinds of feelings that an advisor can also keep you from acting upon. There’s an old tenet that if you’re excited about an investment, it’s probably a bad idea. By extension, when you’re feeling nervous or scared, you also should not make big changes to your portfolio. The truth is that good investment decisions are typically rather boring. Like getting in shape, successful investing requires following through on a series of small but consistent actions that build toward your long-term goals. An advisor can serve as the personal trainer that makes sure you follow through.

Rule #3: Do less than you think you should

It’s important to note that this rule is not, “Do nothing.” It’s “Do less.”

To understand this rule, you can think about soccer. If you’ve ever seen a goalie try to defend against a penalty kick, you’ve probably noticed that they dive dramatically to the left or to the right in anticipation of the kick. Yet, statistical analysis has shown that penalty kicks are divided almost equally across the goal—from the far left to the middle to the far right. Thus, if goal keepers would just stay in place, they would stop far more shots than they do by flailing about. However, it’s hard to stand still during such high-stakes moments. You risk looking like an unprepared fool who’s afraid to take action.

Investors respond similarly to stressful moments, like significant market downturns. This creates a vicious cycle: when we suffer losses because we didn’t make a change, we feel more upset than if we experienced a loss from making a change. At least in the latter situation, we did something. Just like the goalie, we don’t want to appear flat-footed and slow to act.

Psychologists have labeled this tendency “action bias”—the impulse to do something, anything, when something important is on the line. At times, action bias is beneficial, even vital. But not when it comes to financial decision-making (or, it turns out, soccer goalkeeping).

It’s natural to believe that our actions are what generate our results. Because our money is important to us, it’s easy to get caught up in the fervor of Squawk Box, crypto, and stonks, and feel like we ought to do something. It can be hard to accept that the best plan is simply to buy boring securities and hold them for a long time.

Rule #4: Trouble is opportunity

“Buy low, sell high.” That’s an adage that probably every investor knows, but that doesn’t make it any easier to execute. With the benefit of hindsight, we can see that it’s usually best to buy during periods of maximum pessimism and sell during periods of maximum optimism. Unfortunately, we’re wired to do just the opposite. When events are going well and our spirits are up, we see no danger, and when events turn darker, we see danger everywhere.

Historical data show us that following a year of low market returns, the next year typically enjoys a positive upswing. In fact, the lower one year’s return, the higher the next year’s return tends to be. But during that year of low returns, it takes tremendous discipline to stay the course and remain invested. Many opt instead to wait on the sidelines for “just the right moment” to jump back in. But such behavior can significantly erode your long-term gains.

That’s because most periods of strong market performance happen over relatively short periods of time. In the past 20 years, 70% of the best days in the market happened within 14 days of the worst ones. If you’re waiting for “just the right moment” to invest, it’s highly likely you’ll miss some or all of those 14 days. Therefore, those small decisions can dramatically hinder your ability to compound your wealth.

Rule #5: The rules apply…even to you!

As it’s probably becoming clear, the behaviors that generate long-term financial success are pretty simple: work with an advisor, diversify, set up regular contributions, and play the long game. So why don’t people follow through?

We all have a tendency to think that rules are for other people, not for us. We each tend to believe that we are more intelligent, luckier, and better able to predict the future than the average person. This overconfidence leads us to believe that it’s ok for us to bend the rules, especially when external events seem to justify our decisions.

This tendency is known as overconfidence, and interestingly, research reveals that men tend to be more overconfident than women. Women typically make better long-term decisions than men and also to be more patient and more diversified investors. (Truepoint has long recognized the critical role women play in financial success. Join our Women’s Wealth Counsel to connect with other women in the Truepoint circle.)

To be a successful long-term investor requires that we accept that we are not unique. We aren’t actually any better at predicting the future than anyone else, and our emotional reactions aren’t justified and astute while others’ are irrational and short-sighted.

Staying invested means staying invested now. You will always be able to find some reason to believe that “this time” the situation is different—that, this time, the rules don’t apply. But the rules are based on decades of long-term data. They apply to every situation.

Rule #6: Remember your why

To maintain a long-term perspective, you need to stay focused on your goals and your values. Your financial plan should be driven by what’s important to you, not by external market events or “keeping up with the Joneses.” That will give you the motivation and the discipline to avoid some of the common pitfalls investors fall prey to.

Keeping in touch with your why may very well be the most powerful tool in your arsenal for staying the course. Draw on your emotions as the fuel for the right course of action, rather than trigger for damaging behaviors. The good news? At Truepoint, our financial planning process is now built to help you clearly define your why.

Rule #7: Never bet against humanity

The final thought Dr. Crosby left our audience with was the powerful notion that investing is a vote for the future. By investing, you’re indicating that you believe that human progress is arcing in a positive way. To have a long-term plan is to have a plan of optimism and hope.

Becoming paralyzed by fears and indecision means getting bogged down by pessimism. If you believe that a particular world event is truly different from any other that came before it, then you believe that people have lost the ability to overcome adversity. Dr. Crosby encouraged us to look back and reckon with the many trials and tribulations that have come before us. Historical research on investing does not just show us increasing returns, it shows us the incredible human capacity to persist and move forward.

Dr. Crosby brought the fascinating world of behavioral finance to us in an accessible and engaging way, and his lessons were particularly resonant during these uncertain times. His rules of investing provide a solid foundation for recognizing that sometimes investors, including ourselves, are not always rational and that we can sometimes be our own worst enemy. Don’t let your emotions, especially your anxieties, shape your financial decision-making. Craft a long-term, sustainable plan and stick with it, instead. Remember, time in the market beats timing the market, every time.

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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