Slow and Steady
September 17, 2019
When you think about financial success, I’ll bet that fast sports cars, enormous mansions, and fabulous wealth are some of the things that come to mind for most folks. Compensation is a crazy thing. Sure, a few talented and lucky movie stars achieve it. Yes, some gifted athletes achieve it, as do a few extremely fortunate corporate executives. My guess is this group could be called “The Top One-Third of One Percent Club.” For most of us, the realistic path to financial success is much tamer than you might imagine. I frequently proclaim that smart investing is “dull as dishwater,” but sometimes being boring and being successful go hand in hand. I’m sure you’re familiar with the story of the hare and the tortoise and the saying “slow and steady wins the race.” I believe this holds true for your finances just as well as it did for the tortoise.
So how do you practice “slow and steady” finances? While properly balancing your investment portfolio is an important factor, I would say that your behavior as an investor has an equal, if not larger impact on the returns you realize. DALBAR, Inc., the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service, has been constantly tracking the returns of the S&P 500 versus the average equity mutual fund investor since 1984. During that time, they’ve identified a trend that you may not expect. Historically speaking, investment results have a greater dependence on investor behavior than fund performance. This means that the actions you or your financial advisor take (or don’t take) are more likely to impact the growth and returns of your portfolio than the ups and downs of the market. This is great news! No one can predict the market; we can only change how we interact with it. So, controlling individual investor behavior correctly is a major key to success!
Positive changes in your investment behavior
Fear is a powerful emotion. While it served our ancestors well back when evading predators was a necessity, nowadays it can lead to irrational decision making that can ultimately have a negative impact on your financial results. There are two major forms of fear in the investing world: the fear of missing out and the fear of detrimental loss. When you act on these fears you put your investments in a vulnerable position by increasing the odds that you both buy high and sell low. But if you can conquer these fears, the odds of your investments being successful in the long run should increase greatly!
- The Fear of Missing Out: This fear is commonly demonstrated during surges in the market and is driven by desire and greed. Say a stock you are following has a sudden surge of over 30%. When this occurs, the first thought that pops into many people’s heads is to commit to a large investment. They fear that if they don’t act immediately they will be left behind if the stock continues to grow. When greed takes over, the odds of buying at or near the peak of the surge can be a disaster.
- The Fear of Loss: Operating in the opposite market scenario is the fear of loss. This occurs when an investment you have already made has a sudden downturn. Naturally, as you see your hard-earned money disappearing, your first instinct is to stop the bleeding by pulling your investment before more losses occur. Even though this may seem logical at the time, selling during these drops guarantees the losses and you have given up the potential opportunity of recovery. This is known as selling low and is primarily driven by the fear of loss.
By learning to control your emotions and standing strong in the face of your worst fears you can greatly improve the odds of investment success. Falling victim to one of the two fears can have a significant impact on investment performance, and falling victim to both can lead to financial ruin. At the end of the day, the truth is your emotions can have a significant impact on the performance of your investments. And only by recognizing these emotions and learning how to properly react can we best set ourselves up for the opportunity of financial success. Financial success is a lifelong journey. If you charge in unprepared, you may find yourself in the same situation as the hare. But with a more careful and studious approach you are more likely to cross the finish line victorious, like the tortoise.
Go to www.walterfburns.com and take advantage of my free Emotional Armor® Handbook to help you learn to practice “slow and steady” finances. You will find it under the resources tab.