Personal Survival in the Financial Jungle

Welcome to our next installment in Nancy Graham’s “Minding Your Money Matters,” thoughtful financial advocacy vignettes that you can readily apply. In this installment, we’ll turn the focus on the most important contributing factor of all: the personal challenges you face as a long-term investor. 

Personal Survival in the Financial Jungle

If we could impart one message to guide your financial decisions, it would be this: You cannot expect to control global events, but you can (and should) control how you react to them.

This seems logical enough. But well before we heed what our intellect has to say, our instincts love to play tricks on us, resulting in ill-advised gut reactions.

Survival strategies that served us well as we evolved in the frozen tundra and predatory savannahs become our enemy in today’s capital markets. Here are a few examples of counterproductive investment activities that spring directly from our impulse to preserve life and limb, if not fame and fortune:

• Selling low– We react to imminent risks such as plummeting prices by yearning to flee, selling when prices are low.
• Buying high– We react to an impending “feast” by leaping on popular run-ups, buying when prices are high.
• Hyperactive trading– As we itch to land that next big fish, we grow overconfident of our abilities to read the market’s murky waters, incurring unnecessary expenses through hyperactive trading.
• Trusting in illusions – To make snap decisions in a fast-moving world, we constantly perceive patterns … even when none exist. This tempts us to engage further in all of the above financial foibles, and more.

In short, as financial author and neurologist William Bernstein, MD, PhD has observed, “Human nature turns out to be a virtual Petrie dish of financially pathologic behavior.”¹

The Power of Planning

The first step in combatting your financially damaging instincts is to be aware that they exist. But these forces are so powerful and such a challenge to ignore, that it takes more than that to replace them with investment rhyme and reason. We suggest that you and your advisor establish a detailed, written Investment Policy Statement (IPS). Tailored to your long-term financial goals and risk tolerances, your IPS replaces fallible instincts with a structured, predetermined plan to guide your rational decision-making in the financial jungle.

And a jungle it is. In our next post, we’ll discuss important issues around the costs of managing your investments and what you need to know.

¹William J. Bernstein, “If You Can: How Millennials Can Get Rich Slowly,” Efficient Frontiers Publication, copyright © 2014.