Everyone wants to cut out the middleman. When the market does well, many people think: “Anyone can do what an advisor does.” Human nature often delivers a different story.
1. People micromanage. In the industry, it’s day trading. They are on their smartphones all the time because trading is so easy. There’s an oft-quoted analogy: “Your portfolio is like a bar of soap. The more you handle it, the smaller it gets.”
2. People sell their winners and hold their losers. We’re thrilled when we make money. We think we are smart. We are slow to admit mistakes, riding them down. Investors forget the percentage increase required to make themselves whole is greater than the percentage loss that got them there.
3. People assume the lowest cost solution is often the best. It commoditizes the business and trivializes the value of advice. You’ve heard the quote attributed to John Glenn, “I felt exactly how you would feel if you were getting ready to launch and knew you were sitting on top of 2 million parts, all built by the lowest bidder on a government contract.”
4. People lose interest. Investing has become a spectator sport. In this case, I’m thinking it’s an activity people do because their friends are doing it. It’s been said only 8% of people stick to their New Year’s resolutions and 80% fail. Two out of five people quit diets within seven days. Investing is serious, especially planning for retirement. There’s money at stake. It’s expensive to lose interest.
5. People buy things they don’t understand. Investment products can be complicated, especially when borrowed money or derivatives are involved. Some people buy something because their friend bought it. They don’t read the fine print. Their friend probably didn’t, either. If it blows up, they often don’t see why it was their fault.
6. People forget about investments. There’s a downside to giving up paper statements. Your notifications are online. Maybe you need to go looking for them. It’s easy to buy something, especially if it’s small and forget you have it. The orphaned IRA is a good example. Many advisors know someone who bought a stock, maybe made money, but rode it down to pennies on the dollar because it wasn’t in their major account at a big firm (with an advisor). It’s why consolidating assets makes sense.
7. People hear when to buy, but not when to sell. It’s the “My barber told me to buy…” story. It might be a great stock, but did they tell you when to get out? People often don’t give stocks they buy on a friend’s suggestion enough scrutiny and attention.
8. People often keep track of gains and losses in their heads. Ever wonder how your credit card balance gets so high? It’s second nature to hand it over when buying something. You wonder where the money in your bank account has gone for the same reason. It’s cash advances. Investment performance isn’t something you should do from memory.
9. People often fall into the trap of not acting, but reacting. They get scared out of the market by what they hear on TV. The Dow doesn’t rise or fall anymore. It soars and plunges. You’ve seen the statistics of what the average growth fund returned over time compared to what the average growth fund investor earned over time.
10. People misunderstand diversification. During the dot-com boom (and crash) there must have been investors who thought they were diversified because they owned many stocks. If they were in the same sector or industry, they were actually concentrated.
Not every investor makes all these mistakes. Not everyone with an advisor avoids all these mistakes. Not everyone with an advisor follows their advice. But these are mistakes an ongoing relationship with an advisor can help investors avoid.
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