Why Your Investing Behavior Matters
It can be hard to look ourselves in the mirror and take responsibility for our actions. I was recently introduced to the concept of “radical responsibility” and it’s been a game-changer. It basically is the idea that you are always responsible for the outcomes of a situation. This gives me back my own power. If I am ever tempted to blame someone else for an outcome or make myself the victim, I need to take a good hard look at myself and ask “how am I responsible for this result in my life?”.
This is particularly important for investing(and finances in general to be honest). I’ve mentioned Carl Richards on previous blog posts. He is an author who coined the term “behavior gap.” Basically, it’s the gap between a proposed or theoretical investment plan and your outcome. This really boils down to you and how your behavior can adversely affect your outcomes. This graphic really illustrates the point. I have some tips on how you can help close your own “behavior gap” and get out of your own way.
Look at some of the times you made an investment decision. In retrospect, do you think it was influenced by facts and following a strategic plan, or was it done in response to emotions? If it’s the latter, do some work to examine what triggered your behavior. Was it because you didn’t have a good grasp of what your potential investment losses were? Was your portfolio inappropriately allocated? Were you feeling uninformed, therefore it felt better to just get out of the market?
Educate yourself by doing research. Don’t invest in something you don’t understand, period. If you’re talking to a financial professional, don’t be afraid to ask tons of questions. It’s their job to fully inform you of the risks/rewards of every investment they recommend and it’s a red flag if they don’t want to answer them. Once you feel like you’ve asked more questions than is reasonable, go ahead and ask some more.
Go into investing this with your eyes open. Don’t invest most of your portfolio in small-cap stocks without knowing that they are extremely volatile and you can likely lose a lot in any given year. Don’t feel daunted by this, as I’m not saying you need to do in-depth analysis of every investment in your 401(k). However, you should check out the basics of risk profile, fees, best year/worst year returns, return v. the benchmark index to make an informed decision.
Sometimes you don’t even realize that you’re getting in your own way. I know it’s happened to me. I hope this serves you and allows you to take radical responsibility for your investments. Let me know if I can help.