Spring 2013
We humans have an astounding facility for self-deception when it comes to our money. We tend to rationalize our fears to our detriment. Below are 10 arguments many of us use to justify behavior that runs counter to our long-term best interest.
- “I just want to wait until things become clearer.”
It’s understandable to feel unnerved by volatile markets. But waiting for “stability” before investing often results in missing the returns that can accompany risk. - “I just can’t take the risk anymore.”
By focusing exclusively on the risk of losing money, we can end up with a shortfall for retirement. Avoiding risk often means missing the upside. - “I want to live today. Tomorrow can look after itself.”
This argument is often used to justify a reckless purchase, but spending is not an either/or proposition. You can live today and mind your savings. You just need to stick to your spending and savings plan. - “I don’t care about capital gain. I just need the income.”
Making income your sole focus can lead you down a dangerous road. Just ask anyone who recently invested in collateralized debt obligations. - “I want to get some of those losses back.”
It’s human nature to be emotionally attached to past bets, even losing ones. But, as the Kenny Rogers song says, “you got to know when to hold ‘em, know when to fold ‘em.” - “But this stock/fund/strategy has been good to me.”
We all have a tendency to hold onto winners too long. But without disciplined rebalancing, your portfolio can end up with much more risk than you bargained for. - “But the newspaper said….”
Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually has reacted already and moved onto worrying about something else. - “The guy at the bar/my uncle/my boss told me…”
The world is full of experts, many of whom recycle information they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes your specific circumstances into account. - “I just want certainty.”
Wanting to have confidence in your investments is fine. But certainty? While it cannot guard against every risk or possible outcome, diversifying your investments is a rational long-term strategy. - “I’m too busy to think about this.”
We often try to control things we can’t change—like markets and media noise—and neglect areas where our actions can make a difference—like the costs of investments. It’s worth the effort to design an investment portfolio with broad, global diversification at a low cost.
With thanks to Jim Parker, Vice President, Dimensional
