Investing should be simple: spend less than you earn, and sock away the extra. But we get in our own way. First there’s the lure of excess spending. People’s lifestyles are determined more by their peer-group rather than their financial goals. That’s why young athletes with seven-figure incomes end up bankrupt just a few years later. Then there’s predatory financial products: lottery tickets, overly-complex structures, high-fee mutual funds. These confidence games are designed to turn your savings into someone else’s income. Finally there’s contagion: we like to chase performance and get sucked into markets just as they top out. So we cycle between fear and greed at just the wrong time.
When it comes to investing, our emotions are our worst enemy. Investment strategies fall in and out of favor. The time to buy straw hats is in February, but people rarely do. It’s hard to look past the snow and the cold and realize that summer will come again with its heat and humidity. People like to be with other people, and when the crowd is headed one way, it’s hard to go in the opposite direction, or even stand still. But euphoria is the enemy of reason, and financial performance is a coldly rational business.
Great investors say to be greedy when people are fearful and fearful when they’re greedy, but I’d settle for being emotionally stable. Neutrality can be the best policy.
Douglas R. Tengdin, CFA
Chief Investment Officer