You may have been on the sidelines for some time, following the market and see it go up, down and sideways. Pundits tell you now may be the best time to get into the market, while others tell you to get out. Dilettante investors may jump in with both feet first not caring or knowing what the investing temperature is, while pedantic investors decide to put in one toe at a time. Additionally, some investors exhibit alacrity with their investing decisions and usually after getting a “hot tip” without any knowledge of what they are doing or why? Conversely, some decide to weather the storm of uncertainty and stay the course, while others bail on the market and mumble to themselves never to return. Unfortunately, scenarios such as these, although appearing extreme to some, in reality play out on a daily basis. After the financial wounds are licked or financial gains are exuberantly exclaimed, perhaps it is the investor’s psyche of self-talking that is explaining their decision. “An old Wall Street adage states that two factors move the market: fear and greed. Although true, this characterization is far too simplistic. The human mind is very sophisticated, and human emotions are very complex. The emotions of fear and greed just don’t adequately describe the psychology that affects people.”1
Investor Type and You
The psychology of investing or behavioral finance is a topic researchers are delving into with investors and financial professionals paying attention to the findings and results. In essence, why do investors do what they do and then react to what they experienced in some many different ways? “As much as anything else, successful investing requires something perhaps even more rare: the ability to identify and overcome one’s own psychological weaknesses.”2 What terms are used to help describe an investor’s mental preponderance to investing? These include: overconfidence, selective memory, self-handicapping, loss eversion, sunk costs, anchoring, confirmation bias, mental accounting, framing effect and herding.
Amazingly, investor’s if successful even one time before think doing the same thing may yield the same results. This mantra does not seem to be realistic given that markets are prone to financial shifts for a multitude of reasons and at times for no obvious reason at all. Even the most conservative investor who keeps cash in a CD to minimize market risk, is still exposed to risk, albeit a different type-inflation. Any investment whether conservative to aggressive has risk and every investor is exposed to some form of it. The key is to mitigate the risk and attempt to maximize the return and do this within an agreed to investing tolerance. “Investing is the business of self-confidence overcoming anxiety.”3
You Think You Know
Investors have their own thoughts of what investing means and how to do it. In reality, investors may not have a clue of what an asset class is or how one class relates or interacts with another type of class. For example, how does a gold stock fair when placed in a portfolio with large cap stocks and bonds? What effect does inflation, changing interest rates or political unrest overseas have on their portfolio asset class holdings? What strategy does an investor have in place to help decide to hold, sell or buy additional assets-the same or different-for their portfolio?
Knowing what financial personality trait you have can help you minimize your self-talk and propel you into understanding and maximizing your investing strengths. There are those self-motivated investors who once understanding their own psyche can move in a positive direction and be content with their decisions-good or bad. Others even after realizing their investing preponderance and limitations may decide to consult and work in conjunction with a financial fiduciary, i.e., CFP® professional, whose primary responsibility is always doing what is in the best interest of the client. Being honest with one’s self and taking a life’s inventory of current situations and anticipated changes allows for a realistic approach to investing and establishing goals across the board and in all facets of their life. Whether financially self-directed or working with an adviser, transparency, full cost disclosure, knowing your goals and expectations, being realistic with results and understanding your financial personality traits make for a good combination in achieving your bottom line results without second guessing yourself.
Andrew Carnegie said, “Anything in life worth having is worth working for.” Proper financial planning allows your investments to work for you and you reap the reward of prudent investing. Slow and steady may be boring for some and welcoming by others. It is your money and you have the right to invest it anyway you chose or not. Realizing the inherent risks of any investment, no matter how benign in appearance or outlandish in its claims of success, the choice is yours. Choose wisely, know your personality trait and ask for help if you think prudent.
About the Author
H. William Wolfson, DC, FICC, MS, MPASSM earned his Doctor of Chiropractic (DC) and retired after 27 years of active practice. After passing the rigorous Certified Financial Planner™ examination, Dr. Wolfson continued his financial planning education and obtained his Masters of Science (MS) Personal Financial Planning from The College for Financial Planning. He was subsequently awarded by the College a Master Planner Advanced StudiesSM certification.
While in and after private practice, Dr. Wolfson remains active in volunteering his time to the New York State Chiropractic Association (NYSCA), as a board member and past chapter president of Suffolk County, NY. In addition, he serves as the New York Delegate to the American Chiropractic Association (ACA), as well as participating on assorted important committees. For his volunteer efforts he was honored and inducted as a Fellow of the International Chiropractic College (FICC) and awarded the prestigious 2011 ACA Delegate of the Year Award. He is a member of the Florida Chiropractic Association (FCA) and presented at their Business Boot Camp. Dr. Wolfson is a member of the Financial Planning Association (FPA) and volunteers on assorted committees in the Long Island, NY chapter. Dr. Wolfson may be contacted at email@example.com.
1Nofsinger, John R. Psychology of Investing (4th Edition) Prentice Hall: Pearson Series in Finance, 2010. Print.
2″Course 407: Psychology and Investing” Stocks 400 Morningstar Investing Classroom http://news.morningstar.com/classroom2/course.asp?docId=145104&page=1.>
3Kinarthy, Elior. The Psychology of Investing-How To Play The Game and Win Bloomington: Xlibris, 2009. Print.