Published September 26, 2011
Behavior that stymies financial growth
Many investors have the potential to fulfill their financial destiny. But certain behaviors can slow or completely stymie their financial growth.
Here are a few behavioral issues to avoid if you want to stay on top of your investment strategy.
Inertia in investing
Inactivity can prove detrimental to your personal finances, and it could result from the fear of investors to take on risk or a fear of failure.
Evan Kessler, Certified Financial Planner and founder of ESK Capital Management LLC in New York, says one major problem with many clients is the tendency to take on too much risk or not enough.
"Many of my retired clients who were frightened by the large market drop of 2008 are now sitting with portfolios that contain too much cash and/or bonds," he says. He warns that the effects of inflation and taxes will prevent these investors from reaching their retirement goals.
"Although they are not taking equity market risk, they still risk running out of money," Kessler says.
Following the herd
Following the latest investing fad and ignoring your specific goals can take you off the right course to fulfill your investment strategy and lifestyle needs.
David Krueger, author of "The Secret Language of Money," says that herd mentality, defined as the altered state of mind induced by the emotion of group momentum, is what happens when an individual investor abandons an investment plan in order to follow others in his or her peer group. Krueger says the emotional contagion can be due to -- and prolong -- a market bubble such as the Internet tech bubble of the late 1990s. It can cause emotional reaction in the opposite direction, such as the market crashes of 1929 and 2008.
According to Krueger, people make mistakes because they don't have a plan or don't stick to it when emotions run high.
"When herd mentality prevails, the emotion of the right brain holds sway over the logical and reasoned left brain, even at times seizing and holding it hostage," Krueger says. "Greed, emotional contagion and peer pressure trump logic."
Spending an extraneous amount of time analyzing financial paperwork can have negative repercussions.
Krueger says he knew an investor who pored over investment data to choose the most lucrative stocks and bonds, but he couldn't bring himself to buy. In 20 years, he failed to make any equity investments, instead stuffing his money in a low-yielding savings account.
"In other words, he had a great plan but failed to act on it. No matter how wonderful the plan, if it remains a theory it doesn't work," Krueger says.
The best financial decisions come from a balanced decision-making process and a sound strategy for vetting investments. With those two components working in sync, an investor can gather information, assess it and make an informed decision to fulfill his or her plan's goals, Krueger says.
Kim McGrigg, spokeswoman for Money Management International, a credit counseling firm in Sugar Land, Texas, says the sheer volume of financial information available today can make decision-making seem overwhelming. According to the book, "Paradox of Choice" by Barry Schwartz, Americans are often so overwhelmed by choices that many become paralyzed when making decisions and conclude the best decision is to not make one at all.
"The irony is that not making a decision can have consequences, too. Ideally, you want your money to work for you, and it can't do that if you don't tell it what to do," McGrigg says.
"Consumers shouldn't allow the volume of complex financial news that they are bombarded with on a daily basis to overwhelm them. They should stay focused on what is most important to them," McGrigg says.
While we have more choices, and the choices are more complex, the basic rules still apply. "Paying your bills on time and investing for your financial future are always smart financial decisions," she says.
Basing investments on initial research
Anchoring, or the tendency of investors to place undue weight to an initial finding, could lead to bad investment decisions, and ultimately cause you to miss an opportunity to get the most from your investment strategy for lack of knowledge.
"It is important for your financial plan to be flexible and realistic. This is difficult to do if you take a myopic approach," McGrigg says. "In this situation, you might want to hire a trusted financial planner to help you understand all of your options."