The risk of being human

Print Friendly

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.


 For our most popular posts, click here.

This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.


0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!