Retirement Investment | Are Your Investment Decisions Based on Emotion or Strategy?

Sir Isaac Newton once said, “I could calculate the movements of the heavenly stars, but not the madness of people.” What is the profile of investors’ behavior? How do we choose to remember or forget? Dave Doula here with George Advisor Group, giving you sound advice on how to take emotions out of disciplined investing. Stay tuned here for a few minutes and understand why 75% of investors underperform market averages by letting fear and greed get in the way of sound principles.

Selective memory, recency bias, loss aversion, regret aversion, anchoring, and all forms of human behavior that have been built into our brains over thousands of years of adaptation to our environment are often counterproductive. Timing the market or any individual stock is a losing proposition, and those with long-term investment horizons have been able to ride out short-term market volatility with dynamic results.

Now let’s consider the S&P 500 over the last 30 years. According to MacroBond, if you had invested a million dollars 30 years ago in 1991 and never made a move, in 2021 that value would be over $20 million. However, if you had missed just 10 of the best-performing days each year over 30 years, your return would be $6.8 million. That’s right; you would have underperformed by 300% compared to what the market would have done if you had left things alone. Sounds crazy, but it’s a fact.

In today’s social platforms, there are two prevailing stances that drive bad decisions: optimism bias and negativity bias. The former leads to overconfidence and excessive trading, while the latter makes the brain more sensitive to bad news, leading to fear and avoidance of investment opportunities.

But all is not lost. The key is to have a plan that eliminates emotions and creates a mechanism for avoiding missteps and ill-considered decisions. Here are some questions to ask yourself:

Do I enjoy the day-to-day process of handling my investment portfolio?
What do I know about this investment? Am I acting on word of mouth, herd mentality, or particular insights?
Do I actively seek out contrarian opinions?
Do I pause and challenge my investment choices before making a final decision?
What would change my mind to protect against adverse outcomes?
Are there other strategies to protect my portfolio without making rash decisions or trying to time the market?
Finally, besides having a plan, don’t go it alone. Studies show that using experienced professionals to confer with regularly and implementing a disciplined approach will lead to outperformance. Remember, no one can manage your accounts as well as you can is just plain wrong. If your adviser won’t show you their personal account, then run—yes, run as fast as you can.

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