It’s October and my theme of the month will be fear. And maybe a secondary theme of pumpkin spice. We’ll have to see.
An old saying is that fear and greed are the two emotions that drive investing decisions. However, most investors will tell you they don’t let emotions rule their investment decisions. Yeah, right. Let me give you a few examples of language I have heard in relation to investments that shine the light on this phenomenon.
“I’m going to keep my money in cash. I’m sure a recession will start any day now.”
Yes, the person sounds confident in their rationale, but that is only their FEAR of investment losses talking. Besides, there is always another recession around the corner, but they don’t last forever and almost nobody successfully times their way out of investments at the top and back in at the bottom. Nobody!
“My brother made a killing last year on this real estate (or oil and gas, or clean tech, or drug company) investment. I’m going to sell all of my holdings and buy that.”
This person thinks they are acting on sound advice, but really, their GREED is taking over. Keeping your diversified investment plan over the long haul will be more successful than any hot stock tip that’s probably cold by the time you hear about it, anyway.
“I have never signed up for my retirement plan at work because I don’t know how investments work.”
This is FEAR of the unknown or not having enough information to make a good decision. Hot tip: Saving money is never a bad idea, losing out on your company match and tax advantages is always a bad idea, and most 401(k) plans now come with a default option that chooses an investment mix for you. Sign up!
“I will be retiring in a year and need to have more money saved. I am going to invest aggressively to make a higher return before I retire.”
This exemplifies GREED by trying to get more at the risk of losing money right before retirement. It’s also FEAR of not having enough to retire. Rather than take more investment risk than your time horizon calls for, consider working longer. The risks are less and the rewards are more predictable.
Even though none of these statements uses the words fear or greed, they each show the emotions behind the decisions. Stay tuned for next week when I explain to you why you are a bad investor.