What’s the investor’s greatest enemy?
Is it misguided regulation? Stifling taxes? Incoherent accounting? Greedy managers? Surprising as it may seem, the biggest enemy to your investment success is staring you in the mirror.
We’re wired to flee from danger and to join a party. After all, running away from physical danger can keep you alive, and gorging yourself when the getting is good can help you survive long bouts of famine and drought. But when you’re investing, the fight-or-flight response works against your interests.
When markets go down, you should buy more. When they go up dramatically, you should ease up. But we do just the opposite. During the dot-com craze, everybody wanted to jump in, even though many professionals predicted that the market’s run-up would assure investors of a single-digit return future.
Well that’s been pretty accurate: if you bought the market just about any time from 1999 through 2000 you’re still waiting to get your money back. But giving up was just the wrong thing to do. If you bought in annually for the past 10 years, you’d have at least earned a positive return. And if you bought bonds as well as stocks and rebalanced regularly, you’d have earned about 5% a year—not so bad.
The greatest danger to our own investment success is ourselves. Knowing this may help us manage our fears along with our finances.
Douglas R. Tengdin, CFA
Chief Investment Officer
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