Warren Buffett, chairman and CEO of Berkshire Hathaway is quoted as saying: “If you cannot control your emotions, you cannot control your money.” Unfortunately, investors aren’t heeding the advice of one of the world’s richest men.
Research conducted by DALBAR indicates that common investor behaviors - such as buying high or selling low - have caused average investor results to significantly lag the broader markets over a 20-year time span.
If the recent market volatility has you worried about your investments, Jason Labrum, founder, and president of Labrum Wealth Management says now's the time to keep a level head. He highlights the four emotional behaviors we should avoid when investing:
Fear factor
Stock market volatility returned with a vengeance in the first quarter of 2018. We’re less than two weeks into the second quarter and the market turbulence is showing no signs of abating. Labrum says investors shouldn’t be afraid of volatility, it’s to be expected when investing in the stock market.
He says some people are so worried about taking a loss that they’re afraid to put their money to work for them. Yet they expect to find high returns with low risk. Labrum says there’s no such thing. While everyone’s risk tolerance varies, if you only keep your money in safe places, you’ll miss out on great opportunities for your portfolio to grow.
Lack of diversification
Investors know they need to diversify, but some misunderstand how they need to do it. Labrum says holding the same assets in different accounts and locations does not mean you are diversified.
Diversification is varying the types of assets you’re holding. He says you can reduce your risk by investing in various asset classes such as large company stocks, midsize companies, small companies, fixed income, and bonds. Diversification can also help your portfolio weather market turbulence.
Following the crowd
Did your parents warn you against following the crowd when you were a child? We're still not listening to mom and dad. Labrum says herding, or copying the behavior of others even in the face of an unfavorable outcome, is what many of us do when investing. He says the most recent example of herding is bitcoin.
When bitcoin was trading at a record high and dominating news headlines, some of his clients were interested in investing in the cryptocurrency. Labrum advised against it. After soaring last year, the beginning of 2018 wasn’t kind to bitcoin.
The virtual currency recorded its worst first quarter in history, losing over $119 billion in market value. Labrum stresses that buying high and selling low isn’t a solid investment philosophy. Don't invest in something just because it’s the trendy thing to do. Investors should investigate every investment thoroughly before putting money into it.
Information influence
The 24-hour news cycle multiplied by our smartphones equals information overload. An infinite amount of news is right at our fingertips. Labrum says while it’s important to stay informed, it's not wise to react to everything you hear without taking into account your personal situation.
How can the media know the financial objectives and goals of every person they reach? He says investors should review their personal circumstances before making any changes in their portfolio or investment philosophy.
“You have to ignore the things you can’t control and control the things you can,” says Labrum. “If you develop a financial plan and have an investment philosophy that’s rooted in solid fundamentals, you will be successful. You will also have peace of mind, as opposed to being stressed out with the next big headline and how the market is moving every day.”
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