Why is investing such hard work?
Investing should be simple: spend less than you earn, and sock away the extra. But we have a host of habits that get in the way. First there’s the lure of excess spending. Our lifestyles are determined more by our peer-group rather than our 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: complex annuities, high-fee mutual funds, and so on. These con games are designed to turn our hard-earned savings into someone else’s income. Finally there’s contagion: we tend to chase performance and get sucked into markets just as they’re on their last legs, then panic and bail out at the bottom. We’re tempted to cycle between fear and greed at just the wrong time.
When it comes to investing, emotions are the enemy. Different 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. We like to be with other people, and when a crowd is running in one direction, it’s hard to go the opposite way, or even just stand still. But euphoria is the enemy of reason, and financial performance is a coldly rational business.
Warren Buffett says to be greedy when others are fearful and fearful when they’re greedy, but I’d settle for being emotionally stable. Neutrality is often the best policy.
Douglas R. Tengdin, CFA
Chief Investment Officer