Your brain is NOT hard-wired for investing!

It’s hard to see portfolio values go down, or perhaps just not move up much over an extended period of time. For some people that’s why they hire a financial advisor with the mistaken idea that he or she will know when to get in or out of stocks – hoping to get a better return than the market. Wall Street marketing is largely to blame for this perception – primarily in an attempt to justify high fees for mutual fund managers. But what’s the truth? 

What may surprise you, is that behavior is more important than stock picking ability. That’s true for fund managers – but especially true for individual investors tempted to guess how current events will play out in future markets.

Most of my clients have heard me say I like to rely on “dispassionate decisions made with data around the dinner table”. That’s another way of saying there is nothing in the nightly news or on Jim Cramer’s TV show that beats a very long-term view of your personal financial circumstances and a plan on how to best reach your family’s unique goals.  Loss of focus on goals and decisions made with a calm head are what generally produces investment failures in my experience. That's why I focus so much of my professional time and energy around helping my clients understand how markets work and providing information and encouragement to exercise good financial behavior.  

In the book Your Money & Your Brain, columnist Jason Zweig suggests the human brain is primarily driven by emotions when it comes to making decisions - mainly fear and greed. These emotions are valuable attributes for survival but can become a detriment when dealing with investments.  

"This is... Your Brain on Drugs"

Zweig states, "for most purposes of our daily life, your brain is a superbly functioning machine in steering you away from danger and guiding to basic rewards like food, shelter, and love. But that same intuitively brilliant machine can lead you astray when you face the far more challenging choices that the financial markets throw at you every day." In the heat of the moment, fear and greed can take the place of data and dispassionate logic, leading to poor financial decisions – in many cases doing permanent damage to your financial independence and goals.  

YOU are Your Own Worst Enemy

Research firm DALBAR releases an annual study measuring the impact of investor behavior on investment returns. Interestingly, the return received by the average equity investor severely lagged the S&P 500 by over 3.5% annually. Apply dollar amounts to those percentages and it reveals the startling differences in accumulated wealth based on a starting investment of $100,000 (almost $3M difference in 30 years!).  DALBAR reports that investor’s response to psychological factors (their emotions) account for the bulk of this shortfall.

So…be careful. The current news cycle has some very complex variables which are admittedly scary. Whether it be potential debt default, war in Ukraine, inflation, Chinese tensions, immigration surges at southern border, social unrest or political angst, there are plenty of things on the news which could easily distract you.

So should you work with a financial advisor or attempt to manage your own assets? I’d suggest that even those who have the greatest degree of sophistication need someone to objectively discuss important financial decisions with. For example the CEO of fund company Dimensional Fund Advisors hires a financial advisor. Why? Well, it’s been my experience that everyone needs encouragement to do things they already think they should do and sometimes they need someone to question a move that is emotionally compelling but could ultimately harm them. IE: they need advice and guidance from someone who has their best interest and depth of experience. 

Why work with a financial advisor?  A competent advisor cannot see around corners, nor can they wave a wand to give you positive returns in down markets. BUT – what they can do is help you identify how you should be invested to most consistently meet your goals given your level of comfort with portfolio volatility. They can also provide the experience, perspective, and emotional support to make wise decisions. There’s a reason individual investors lag markets by such a wide margin – it’s because they lack the critical help an excellent financial advisor provides!   

My suggestion: find an experienced advisor who is a fiduciary and charges reasonable fees. Next, you will need to find someone who you both like and trust to navigate changes in your life and markets over many years.  If you are able to find an advisor who meets these criteria, you are MUCH more likely to reach your goals than going it alone in a world with increasingly complex things to distract you…