When Investor Instincts Lead to Sabotage
This piece from the New York Times aligns well with our approach to investing. We work with investors who are more interested in having a simple, diversified portfolio that reflects their risk preferences, rather than those who attempt to time the market.
The article talks about the ideas in behavioral finance expert Daniel Kahneman’s new book Thinking Fast and Slow. Most behavioral finance theorists would agree that the most rational approach is to develop a portfolio that corresponds with the amount of risk that you can afford, make sure it aligns with your particular objectives (retirement, planning for college, etc.), and then don’t think about it too much.
However, for most investors, this goes against our nature. We worry. We wonder if we should be doing what our neighbor is doing. We don’t wan to miss out on the next big thing. This is a product of our impulse-driven “lizard brain,” the part of us that seeks short-term gratification and is motivated by fear or greed.
The role of the financial advisor is to help you fight these investment impulses and retain that rational perspective for the long run. How do we do it? The best start is to personalize your portfolio with your specific risk preferences and balanced, diversified investments that will serve you well over the long term (with periodic rebalancing, of course).