March 28, 2016

Investment Mistakes are Really Investor Mistakes

The investor’s chief problem and even his worst enemy, is likely to be himself.
Benjamin Graham, British-born American economist

Investor behavior has more to do with the success of a plan than investment behavior. Wealth isn’t primarily determined by investment performance, but by investor behavior.

Many investors are constantly diving into funds with spectacular past performance. When the funds go cold, they jump to the new hot performers, only to watch those funds go cold as well. Then the cycle repeats. This cycle of disaster is one of the main reasons why the average investor does not get the same return as the average investment. When you employ this tactic, you are essentially “buying high and selling low”, never a sound investment tactic.

Having a financial plan based on your own goals/dreams/desires helps with investor behavior. Your personal financial plan will be your blueprint to fall back on when you have the urge to act on your emotions. A portfolio of random investments is not a plan. Every dollar you invest should be tied to one of your specific goals. A portfolio needs to be in service to a plan; otherwise, it has no other goal than to beat other people’s portfolios. But “outperformance” is not a financial goal. An income you don’t outlive, to cite one critical example, is a financial goal. If your portfolio “outperforms” mine, such that I run out of money when I am 75 and you run out of money when you are 82, it’s not going to matter to either of us when we are both 85 and out of money.

Having a structured, disciplined and goal-oriented approach to investing helps protect against the common behavioral mistakes that can compromise your long-term financial success.