The risk of being human

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Last week we discussed different aspects of risk and how to measure it. I’d like to follow up with a short note about a primary source of risk. I’m sorry to say it’s looking you in the mirror.

Human nature can be costly

More and more peer-reviewed research is piling up that confirms an unhappy truth – individual investors are highly prone to decisions and actions that hurt their investment results.

This “you risk” can take many seductive and self-defeating forms, including:

  • Making impulsive changes in strategy due to recent results
  • Chasing hot stocks that have been in the news
  • Overestimating your ability to predict future events
  • Ignoring costs and taxes
  • Putting faith in commissioned brokers, friends, relatives and other “experts”
  • Acting on hunch, hope, fear or greed

All of these behaviors are common and natural. Anyone who has invested without the guidance of an unbiased fee-only investment advisor has likely made at least one of these gaffes, and probably more.  Over the years I certainly have done so myself.

Protection from yourself

The good news is that you risk is completely avoidable – by enlisting the help of a money manager whose goals are compatible with yours, staying informed, and holding the manager accountable for investment process and results.

An advisor can act as a buffer between your money and your emotions. After implementing a plan that aligns with your long-term goals, your advisor is the first and most important line of defense against the impulsive, emotion-driven changes you may want to make. This buffer is especially critical when markets are falling and the news cycle runs dire.

The only thing that may be preventing you from enlisting the help of a fee-only advisor is another very human instinct – hesitation to ask for help. This can be a tough hurdle to clear, but in my view it’s far better than “front seat driving” your own portfolio while distracted by headlines, emotions and instincts.

Don’t let that guy or gal in the mirror derail your financial plans. Take you risk out of the equation.


 

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