investor behavior

Investor Behavior: What Can You Control?

Know What You Control: Investor Behavior

Investor Behavior is the most important consideration for future investing success. If you know what you can control, you are more likely to succeed!

What can an investor control? This is particularly important to consider after a long bull market with lots of froth at the edges. 

What Can’t We Control?

Let’s start with what we CAN’T control. We can’t control the stock market, or what happens in DC, or around the world. When considering investor behavior, it is important to understand that we can only react to the news. Or, not react to the news!

The stock market does what it does. Remember, you don’t care! There is only two times you are about what your asset is worth–when you buy it, and when you sell it!

As for politics… well it is nice to know who is threatening what change in which tax policy. But in the end, what can you really do about that? You cannot control that politicians make political decisions. The scales shift from one side to the other, only to go back again.

And why bother reacting to the news? It is mostly made up anyway. Crisis here and crisis there: remember, the point of media is to sell eyeballs advertising not to inform or enlighten. They push your buttons just to get a response out of you. If it bleeds it leads.

Over the long term, the stock market has always gone up. There will be black swan events, and crashes and probably worse. But if your investing horizon is more than a few years, park it in the market and forget about it.

You can’t control the news. The good news is that you don’t have to; you just have to ignore it!

Investor Behavior and What We Can Control

So what can we control?

I love this cartoon drawing! This is investor behavior!

What we only focus on: Return. What we don’t control: Return!

Next, What we rarely focus on: risk, cost, time, and behavior. Stated explicitly: the very same issues that we actually control are the ones we rarely focus on!

Investor behavior is about paying attention to what we can control!

Investor Behavior

What is investor behavior? This is what gets in the way of you having a good long-term outcome. Seriously now, we all understand what it takes to be a good investor. Put your money to work early and often in broadly diversified indexes, and never sell!

It is not just understanding that you have biases, it is knowing what your biases are and setting up roadblocks for them. 

It is good behavior, and also keeping it simple. We know complexity favors the seller (that’s why there are so many complicated bad products out there), so keep your investing simple.

But more even than that, keep your investor behavior pure. Understand your investor philosophy, know that markets crash, understand risk tolerance and asset allocation, and stick with your plan.

In order to have good investor hygiene, where do you want to focus your energy? Of course, on things that you can control!

Investor Behavior: Know What you can Control

We know you can’t control the market. You can’t control returns. Nor the news of the day.

What you should focus energy on:

Risk:

Risk is relative to what you invest in. Asset Allocation. Understand when it is time to de-risk and know what a conservative asset allocation is for sequence of return risk.

Risk goes beyond market risk, especially in retirement. You must understand your sources of income in retirement and figure out how they mitigate the top 10 retirement risks.

Cost:

This one is a biggie. Small changes in expense ratios matter over 10 or 20 years. An expense ratio of 0.5 was good a few years ago, but in the race for the bottom of expenses, it is not good enough any more. Mathematically, you will succeed every time if you lower your expenses.

Control you cost by avoiding AUM advisors. The 1% AUM charge will kill you in the long run. Practice investor hygiene and avoid expensive financial advise.

Time:

As the saying goes, time in the market is better than timing the market. Start young with a high savings rate. Early on, it is all about savings rate.

Investor hygiene means not timing the market. Start young. Dollar cost average. Stick with it.

When you no longer have time on your side, see Risk above.

Behavior:

Don’t sell when the market goes down. Sell only for a pre-specified reason based upon your investment plan.

Don’t panic! When the market drops, run outside barefoot with a basket in your arms collecting the money falling out of the sky. It’s time to be greedy when other are panicked

Yet understand that you may be anxious when markets crash. Don’t go for the best returns, go for the best anxiety-adjusted returns!

Controlling investor behavior is the most difficult aspect of being a successful investor. First, don’t worry about past mistakes. Second, don’t make that mistake again! Finally, remember what you can control and only worry about that.

Know What You Control and Succeed in Finances (and Life)

Investor behavior is important. Know what you control!

Avoid the cardinal sin in investing: don’t sell low!

Keep it simple. Have a Plan. Stick to it.

Investor Behavior may not be the sexiest topic (it won’t get me on the news!), but its all good if it keeps you invested and able to obtain your goals.

 

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2 Comments

  1. Wow- terrific post! Everything you said is so true and so important to remember. I just sent this on to my adult children to hopefully read and learn.

    Thanks for what you do!

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