By Diana Palmieri
Too often, our emotions hinder us from making prudent decisions–not just with money but all aspects of life. How emotional are you when it comes to investing? Do you want to sell everything as soon as you hear the market is down? Do you hang onto inherited stock simply for the fact if your grandmother was alive, she’d kill you if you sold? Have you taken some great stock tips from friends only to lose your shirt? Here are a few traps that I’ve encountered over the years both with my own clients and with speaking to fellow advisers.
The Ralph Kramden Get Rich Quick Scheme
For those Honeymooners fans out there, you know about poor Ralph, always frustrated by a lack of money and always trying to make a quick buck. One of his great ideas was coming up with a great idea for a food product, only to find out afterward that it was actually dog food. The trap here is doing little or no research prior to buying. I get phone calls from clients saying, “Hey, I got this friend who gave me a great tip,” or “I am guaranteed to make money on this,” or “My friend made a couple of thousand on this company,” and then I am left to bring them back down to earth. It’s not that I don’t think there might be an idea out there that could conceivably make someone money. It’s just that usually a new idea is considered speculative, and speculation can lead to loss. My job is to help my clients preserve wealth and make better decisions with their money. It is really very important to do your homework or have your advisor do the homework and reviewing an investment carefully prior to jumping in.
Buying High and Selling Low
This is one of the larger traps. Investors too often sell low during bear markets, then wait for some sort of clear sign that there’s a market turnaround. Then when that turnaround occurs, usually after prices have zoomed up after a sell-off, they go back in and buy at a higher price. If they just would’ve rode out the storm, they quite possibly could have made their money back. Here’s a personal example going back to the September 2008 financial collapse. These particular clients, worried just like the rest of us, considered selling some assets but waited out the rest of 2008; January, February, and March of 2009; and then finally decided “okay we’re done” and wanted to sell everything. After my repeated attempts to coerce them not to sell, they sold a good deal of assets in April of 2009, locking in sizeable losses. In April of 2010, we had another conversation where they wanted to know a “what if I held on to it” scenario that I put together for them. They would have made back all of their money and then some if they just would’ve kept a cool head and thought of the longer term.
Unprepared for Change
When a trend has been in place for a few years, it’s hard to imagine that trend not continuing. Going back to the doing-your-homework-before-investing point, same goes for being prepared for change. Change IS on the horizon, but most investors are unprepared. It often becomes too easy to have the highest exposure to a particular sector or category of investments at the wrong time. Then the boom happens. Then you are left to pick up the pieces.
In closing, one of the most important elements of successful investing is being able to view investments without emotional attachment. This is easier said than done. Some folks may have received and invested a large sum of money because of an injury, loss, or inheritance, and these assets are a constant reminder. Some folks just don’t like to lose money. All true; however, emotions are the biggest threat to your portfolio. Be aware, and don’t be afraid to seek out an advisor to help you keep those emotions in check.
The information contained in this article is not intended to constitute legal, accounting, tax, investment, consulting or other professional advice or services. For specific information that applies to your circumstances you should consult a qualified tax advisor. In accordance with IRS Circular 230 Disclosure, and to ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this article was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Diana Palmieri is dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated. Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB.
