THE INVESTORS’ DILEMMA

Investing is usually done in an effort to have money to accomplish life goals and realize dreams.  Knowing we have money for the future can offer a sense of peace in the present.  However, instead of bringing peace of mind, investment decisions are often complex and confusing, leading to overwhelming feelings such as distress, worry, and anxiety.            

Have you ever worried about:

Getting high enough returns on your investments?

Maintaining your standard of living at retirement?

Affording high quality education for your children?

The next market crash?

The next market boom?

Missing out on the latest, greatest stock tip?

Making sense of all the investment information available?

Someone else having a better portfolio than you?

Not having money to care for loved ones?

Getting bad investment advice and, worse yet, paying for it?

Buying high and selling low?

If you can answer “YES” to any of these questions, you have been caught in the Investors’ Dilemma.

The Investors’ Dilemma is a cycle that explains why many investment decisions are driven by emotional and psychological biases that may be inconsistent with an investor’s long term financial goals.  On the one hand, investors want assets to grow to the point where enough wealth has been accumulated to meet personal financial goals.  Yet, for most, this will only happen by investing money prudently.  Therefore, investors need to make decisions and select strategies to maximize investments year after year.  Unfortunately, the actions investors frequently take are likely to be self defeating.  Let’s look at how each step of this counterproductive cycle interferes with an investor’s ability to develop and maintain a prudent investment strategy. 

Understanding the Investors’ Dilemma

1.  Fear of the Future

The cycle begins with a sense of uncertainty about the future, characterized by questions like: “Will there be enough money to maintain my standard of living?  How much do I need to save?  How do I know what is the best investment?”  The media and advertisers prey upon this fear of the future in an effort to sell products.

2.  Forecast and Predict

Because of this fear of the future, investors have a strong desire to comprehend and predict future events.  If someone could tell what is going to happen with inflation, long-term interest rates, share prices, overseas markets, then there would be less to fear about the future from an investment perspective.  Along these lines, investors are frequently convinced that someone has the information, power, and insight to forecast the future. 

3.  Track Record Investing

The primary method investors employ to convince themselves that the future can be foretold is through track record investing.  This means they look for stock managers who have performed better than the market in the past with the hope that they will continue to have superior performance in the future.

4.  Information Overload

In the past, gathering information was the best way to guide prudent investment decisions.  However, the current Information Age has created access to so much information that it is easy to become overloaded.  Investors feel compelled to understand all of the information:  the internet, books, newspapers, magazines, TV talk shows, advertisements, friends’ experiences, etc.  Indeed, instead of reducing fears, this deluge of information often intensifies doubts about investing.

5.  Emotion-Based Decisions

As investors, we never overcome our own humanity.  Even though most investors prefer to think that they make investment decisions based upon logic; typically emotions, such as trust, loyalty, hope, greed, and fear, drive our investment decisions.

6.  Breaking the Rules

There are three commonly accepted rules of investing: 10 Own equities, 2) Diversify and 3) Rebalance.  And, the golden rule of investing is: Buy when prices are low, and sell when prices are high.  It sounds simple.  However, when investors make decisions based on emotions, they wind up breaking these seemingly simple rules, thereby sabotaging their portfolios.

7.  Performance Losses

Performance losses means investors fail to capture the returns they expected.  Unfortunately, because investors so frequently break the golden rule of investing, they do not receive the rate of return they expected.  Investor performance does not equal investment performance.  When this effect is compounded over a period of years, an investor’s potential for reaching financial goals is significantly decreased.  Such loss creates additional frustrations and fears about the future, once again initiating the cycle. 

THE RESULT:  Not Enough Money and No Peace of Mind

The end result of the Investors’ Dilemma is not having enough money combined with worry, frustration, and anxiety about the inability to accomplish meaningful life goals.

For most investors, the Investors’ Dilemma remains undefined and continues over a lifetime.  The first step to operating outside of this cycle is becoming aware of it.  (You’ve already done that!)  The next step is to choose an investment philosophy in which you believe.  An investment philosophy is made up of three fundamental principles: Your True Purpose for Money, your Market Belief, and your Investment Strategy.  Choosing your Investment Philosophy involves defining these three principles for yourself.  It will take time, information, personal thought, and a gut check to determine what is true for you in each of these areas.  The time and effort involved in this process is more than worth it.  With a clear Investment Philosophy, the confusion, concern, and anxiety so prevalent in the Investors’ Dilemma can disappear.  The goal is to get one step closer to peace of mind about your financial future. 

For more information about defining your Investment Philosophy and achieving True Peace of Mind about your financial future contact our office.