The Natural Tendency to Self-Destruct While Investing
Why does it seem like investing is so hard?
Why is it that so few seem to be able to build lasting wealth?
It’s because building wealth through investing requires you to squelch almost all your natural instincts. Disciplined investing means you must conscientiously recognize your own behavioral finance mistakes and stop them in their tracks.
One of the most common ways I see investors self-destruct is by chasing returns and ditching after-market declines.
What do humans hate more than missing out on what everyone else seemingly is getting? This is also known as FOMO (or the fear of missing out!).
Here is what FOMO (Fear of Missing Out) looks like with investing:
It’s 2021 – it’s a great year in the stock market. You keep hearing friends and coworkers talk about their double-digit returns. You think to yourself, “Hmm… maybe I should get in on that too!” So, what do you do? You sell your conservative investments and push the money into more stocks…. after the market has already had its major run up.
Meaning, you already missed out on most of the double–digit returns and you invested at the stock market highs – severely limiting the future upside.
Then comes January of 2022, the market starts to slide, and you think, “Oof – I can’t handle losing another dollar more. I need to get out now.” (This aversion to risk is why you had the conservative investments in the first place!). So, you end up selling those stocks AFTER they have already experienced most of the decline. This is the surest way to self-destruct your portfolio.
So what should you do?
You should RESIST the urge to abandon your investment portfolio. If you had conservative investments like bonds, it was probably for a reason. You should likely stick with your original plan. Trust me, everyone has a “high-risk tolerance” when the market is doing well. Our true tolerance for risk isn’t revealed until we experience a decline.
Alternatively, if you aren’t invested at all – don’t just throw in all your cash all at once upon hearing about favorable market returns. Consider setting up a regular investment plan (dollar–cost averaging) and most certainly invest it in a real portfolio built for you and you risk tolerance – not just a dump into the stock market.
You may also find it helpful to read my blog on Behavioral Investment Mistakes I Bet You’ve Made. I must reread this one myself on occasion to make sure I self-correct my own biases!