What Kind of Investor are You: Confident or Scared?

Aug 2, 2016 Willow Creek Wealth Management Posted in Articles

Are you a confident investor, or is the process fraught with fear and uncertainty? A 2015 study by the American Psychological Association found almost three-quarters of Americans are experiencing financial stress — at least some of the time. One of the top sources of money-related stress was saving for retirement. On the surface, retirement planning seems pretty simple — spend less than you earn so you can save something. Regularly invest some of the savings in low cost index-style mutual funds and the time-value-of-money can pay off handsomely when you are ready to transition to a retirement paycheck. Despite this simple formula, many people feel intimidated, view the market as a house of cards, and end up losing money as they jump in and out of investments buffeted by an emotional headwind created by their own ingrained and unacknowledged attitudes towards money. Here are some psychological tools for destressing your experience with money and investing:

Adopt a Diversification Perspective

Risk-averse investors may not totally achieve the certainty they crave, but investing in a variety of stocks and bonds allows the majority of the portfolio to continue to grow even when a few investments do poorly. Often, investors who view safety as a primary concern experienced trauma of some kind at an early age. Avoiding loss at all costs fails to take into account the historical significance of long-term investing in which gains have greatly outnumbered losses.

Have an Investment Plan

Anxious investors should work with a financial planner to establish the appropriate risk/return allocation for their particular situation. Impulse selling is one of the reasons most do-it yourself-investors end up with portfolios that consistently underperform a simple index such as the S&P 500. Reviewing your investment performance regularly, but not too often, and tuning out the media’s market “noise” is also helpful. Too much divergent information makes it difficult to contain the tendency to worry.

Separate Self-Worth from Financial Worth

Investors with self-esteem issues tend to be drawn to speculative stocks. A useful approach is to develop a balanced portfolio and seek personal reinforcement from career achievements and fulfilling family and community interactions.

Avoid the Inheritance Stigma

Guilt-laden investors tend to approach investing with a sense of helplessness. There can be a reluctance to make necessary changes or profit from the bequest. One way to neutralize these feelings is to work with your advisor on really understanding the proposed investment philosophy and portfolio recommendations. Viewing an inheritance as a passing of the baton can alleviate the stigma society puts on money that is acquired rather than earned. The most successful investors understand that financial interactions are deeply intertwined with emotional bias. They learn to recognize their own unproductive patterns, alter their behavior and take advantage of the rewards of disciplined long-term investing.