Inside the Investor's Mind
July 22-24: Get a practical take on behavioral finance to improve your investing results.
One of the most thought-provoking quotes I've encountered since becoming site editor of Morningstar.com is all of two words: "Don't peek."
"Don't even peek at your own account, don't open those 401(k) statements," was advice offered by none other than Vanguard founder Jack Bogle in an October 2011 interview with Morningstar's Christine Benz.
Calling it "One of the greatest rules for investing ever made," Bogle was offering an antidote to investors' typically detrimental tendencies to react to all the short-term fits and starts of the market.
"The moment the temptation gets to its highest level [is] when people start to think, 'I've got to change now,' and that's the worst time to do it," he added.
This interview really stuck with me, because here we have one of the investing industry's brightest luminaries essentially saying that our own human tendencies are so strong--and so often counterproductive to investing success--that we literally should avoid even peeking at our portfolios.
In achieving investing success, so much focus is given to the role of your investments--and yes, finding the right ones is an eminently worthwhile endeavor--but just as much success (or failure) may hinge on the role of you--that is, your own behavior and buy/sell decisions. And unfortunately, when it comes to your own role in investing, you just can't always rely on yourself.
"Our animal brains are incredible instruments designed to keep us safe in an unpredictable and dangerous world," explained financial psychologist and author Brad Klontz in a recent Q&A with Morningstar's Adam Zoll. "When faced with a challenge, our instincts take over and we engage in a fight-or-flight response to increase our chances of survival. However, when it comes to investing, our animal instincts are dead wrong."
Which brings us to this special report. Understanding how our human instincts fail us when it comes to investing is the first step to getting over ourselves and staying on the right track toward our goals. We really need to know these shortcomings because, let's face it, you're gonna peek. And so am I. In fact, sometimes I peek a lot. But, I rarely trade.
Why is that? Well, I've made a little investing contract with myself. I'm primarily a long-term strategic investor, most interested in using the market to fund a comfortable retirement. (If I can also beat the market along the way, that's great, but not my primary concern.) To reach my goal, I know I need to tap the long-term higher return potential of stocks, but in order to capture those potential returns, my contract says I've got to live with the (sometimes extreme) ups and downs that hit stocks along the way. I may not like it, but I've got to do it--so says the contract. The contract also puts me on the hook to save a certain amount every month for a certain number of years. Of course there are no guarantees, but I know if I don't fulfill my contractual obligations, the goal only gets harder to reach.
I don't know if the behavioral psychologists would approve of my contract or not, but it helped me through 2008, and I'm still sticking with it--knowing my own limitations and shortcomings has helped me do so. Likewise, I hope this special report helps you know yourself and your own tendencies a little bit better, and puts your own investing goals a little bit closer.
Check back here each day as we post new content July 22-24.
Monday | July 22: Behavioral Basics
10 Behavioral Pitfalls: A Primer
Successful investing requires a rare ability to overcome one's own psychological weaknesses--but you have to identify them first.
5 Mental Mistakes That Can Punish Your Portfolio
Even seemingly small mistakes can take a big toll on your portfolio, says Morningstar's Christine Benz.
Topnotch Funds That Investors Have Used Well
Investor returns have outpaced total returns for a handful of analyst favorites.
Use Behavioral Finance to Curtail Spending
Eight ways we can reprogram ourselves to side-step our worst consumer impulses.
Lifelong Money Habits Rooted in Our Youth
Financial psychologist Brad Klontz explains how childhood experiences help shape our financial futures.
Heard on the Boards: Have Emotions Impeded Your Investment Decision-Making?
We'd like to know whether you've noticed behavioral biases creeping into your own investment decision-making--and what you've done about it.
Tuesday | July 23: What Mistakes Are Investors Making Today?
Where Are Investors Chasing Their Tails?
Morningstar's investor return data can reveal which types of funds investors are using well, and which they are using poorly with mistimed purchases and sales.
Marks Takes the Market's Temperature
For several years, investors have been acting bullish (if not thinking bullish) in bonds, bidding up safe instruments, while the interest in equities is still modest, with the potential for more relative value, says Oaktree's Howard Marks.
Avoiding Today's Lurking Behavioral Land Mines
Investors' scars from the 2008 market downturn are still looming just beneath the surface, says financial planner Mark Balasa.
Behavioral Traps in a Strong Market
Author Carl Richards urges caution of the many biases that can creep into investors' mind-sets and how they might be playing out today.
What Behavioral Mistakes Are Investors Making Today?
Morningstar strategists weigh in on the biggest mistakes they see in the marketplace today and whether those errors have created any opportunities.
Where Investors Over- and Underreact
Opportunities can emerge when investors overreact to vivid emotional anecdotes and underreact to new and surprising data, says Fuller & Thaler director of research Raife Giovinazzo.
How to Avoid--and Profit From--Common Behavioral Errors
Investors can boost their outcome by resisting behavioral pitfalls, avoiding hyped stocks, and looking for underappreciated signals, says Fuller & Thaler director of research Raife Giovinazzo.
Wednesday | July 24: Behavioral Pitfalls in Retirement
Traps in Building Wealth for Retirement
Morningstar's David Blanchett examines how aversion to save while younger, fear of loss, performance-chasing, and high ownership in employer stock are problematic areas for retirement accumulators.
Psychological Road Blocks to Retirement Income
Financial planner Mark Balasa addresses why a total-return approach is more ideal for retirees than an interest-only strategy of the past and why investors shouldn't listen to short-term noise.
The Pitfall of Mental Accounting in Retirement
Professor Meir Statman advocates a structured, total-return approach to income so retirees can tap their portfolios responsibly.
Bucketing: It's in Your Head (in a Good Way)
The practice of segmenting a retirement portfolio by time horizon can help ease key retiree worries.