Does Being Human Hurt Your Investment Results? Part II of III

Fred Taylor, my friend and fellow financial coach, points out that most investors make serious investment errors because they don’t realize how influenced they are by human psychology and their own emotions.  In a recent commentary, Fred quotes psychologists and authors, Carol Tavris and Elliot Aronson:

“The brain is designed with blind spots and one of its cleverest tricks is to confer on us the comforting delusion that we, personally, do not have any blind spots.”

We’re all guilty. We’re human and we have blind spots. This is one of the biggest roadblocks that prevents investors like you and me from having long-term investment success. These emotional “feelings,” of course, are aided and abetted by the media. The financial services industry also uses our emotions to sell products. Please keep this in mind: the media’s first order of business is to drive ratings. The media knows that manias and doom and gloom drive up ratings. Education and information do not. And those financial services experts? They earn outlandish attention by giving outlandish advice. 

Here are a few of the more interesting 2009-2010 illustrations of market predictors and the media publicizing opinions that help to emotionally grab investors and keep us making decisions that can only be described as harmful. Fred Taylor and I believe this is fully illustrated by investor behavior over the last four years (since the market bottomed back in 2009 and the S&P 500 has now risen around 60%).  I won’t attribute these illustrations so I can protect the guilty but if you’d like to contact me I will share my sources with you (or  http://www.summitinvestorcoach.com/2013/07/01/does-being-human-hurt-your-investment-results/" find them on my blog):

October 26, 2009:    “The S&P is about 40% overvalued”
January 11, 2010:    “US Stocks Surge Back Toward Bubble Territory”
June 18, 2010:    “Andrew Smithers, an excellent economist based in London, is telling us that we’re way too optimistic, that a fair value for the S&P 500 is actually in the 700 to 750 range. Smithers, therefore, thinks the stock market is about 50 percent overvalued.”
July 13, 2010    “On a valuation basis, the S&P 500 remains about 40 percent above historical norms on the basis of normalized earnings.”
So how do you and I stay focused on investment facts? How do we avoid getting swept up in the emotional hysteria that often disguises itself as cutting-edge media reporting or the informed opinion of highly respected investment experts? We stick with some basics. Below are five keys. I’ll explain each of them in my next post.

If you can’t wait for the details, feel free to contact me. Call me, Gene Offredi, CFP, RFC at 203.453.1017.
You can also visit  http://www.summitinvestorcoach.com/ my website or  http://www.summitinvestorcoach.com/blog/ blog.

1. Compound interest is what will make you rich. And it takes time.
2. The single largest variable that affects returns is valuations — and you have no idea what they’ll do.
3. Simple is usually better than smart.
4. The odds of the stock market experiencing high volatility are 100 percent.
5. The industry is dominated by cranks, charlatans, and salespeople.