Under Control

When do people make the most painful investing mistakes?

There’s not a lot of research on this, but I’d bet that most investment errors are linked to charged emotions. The behavioral biases that most often affect investors are well-documented: overconfidence, loss-aversion, confirmation bias, selective perception, and so on. What’s not well-studied is what makes us subject to these cognitive errors. One major factor has to be our emotions; whether we’re elated or depressed, getting emotional with our money rarely ends well.

This is more easily said than done. When an investment works well, there’s a rush of pride and it’s easy to give ourselves a virtual high-five. Conversely, falling prices often cause us to seethe with frustration and go through the five stages of grief. But overconfidence is self-defeating, and losses can multiply. Some investors have documented when they invested for revenge, or to get back to even, or just to prove that they were right. By their own admission, these were terrible reasons to put money to work.

I’m not saying that we all have to be Mr. Spock, with no emotional commitments. It pays to be passionate about your pursuits, if that leads you to do more research or gain a deeper understanding of a market’s character. But money has no loyalty, and an investor’s goal should be to make a critical yet honest assessment of their own financial landscape. Getting “stoked” may help an athletic performance, but it doesn’t do our wallets any good.

Keeping our emotions under control can help us avoid the most common investment pitfalls. It’s one more reason why the first rule of investing is to understand ourselves.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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