Today’s post is a little about psychology and how our brains work. I don’t profess to be an expert in these areas but as a Financial Planner, I have learned a lot about how people think when it comes to money and most importantly how they are influenced in their investing decisions.
Here is a question for you: How much of what you see and hear on TV, in Newspapers or from family or friends influence your thinking as it relates to investing and the economy? I’ll bet it is much higher than you think. It’s not that it is necessarily a bad thing , but to often people tend to get caught up in the theme or trend of the moment and let it influence them to make sporadic off-the-cuff decisions.
Why do you want to buy gold?
This topic came to mind as I had a few discussions with clients over the past month along with one notable conversation with my own Mom. Two weeks ago Mom said, “We should sell everything and buy Gold because the dollar is going to crash”. My response was simply “really, why do you think that?”. Her response was the same as many others I have spoken with: the economy stinks, we have to much debt, etc, etc. But what I really believe is that the relentless commercials telling her to buy gold and the media coverage of all the debt issues in the world finally sunk in.
The problem I explained to her was that she may very well be right, but that ship has already sailed. The time to make that trade would have been a couple of years ago, not after things have reached an extreme. (I remember having this same conversation with clients about Real Estate 5 years ago) In fact I noted that anyone jumping on that strategy at this point might be setting themselves up for some disappointment over the near term. (ps. I think Mom called the intermediate top in Gold and the bottom in the Dollar! I need to put her on the payroll!)
Are we really rational?
Is it that we are so influenced by the media that we let it affect our rational decision making when it comes to investing? I do believe it is so. When the markets first started rolling over in early August and the financial TV stations started screaming a double dip recession is coming, I encountered a few emails from clients asking if we should sell everything and/or increase bond exposure.
I explained to these clients that we had already reduced equity exposure back in the Spring when the markets were much higher and that we were very conservatively invested (which is what our retirement planning model called for). So even though these clients were well insulated from the market correction the fact that all the Financial Guru’s on TV were screaming about a double dip recession had them panicking and wanting to make changes that they did not need.
Our Worst Enemy
The human emotions of greed and fear can be an investors worst enemy. These emotions create bubbles along with panics and are greatly influenced by what we see and hear everyday. It is also the reason that many individual investors tend to underperform the markets as they buy high when something has already taken off and then sell low when they are scared. If you can conquer this urge and not follow the herd, you will reap the rewards. And I leave you with a famous Warren Buffett quote “Buy when others are fearful and sell when other are greedy”.