Investment Behavior Matters

How investors behave when exposed to real-world events is an emerging field of study. While not as data-centric or numeric as securities analysis, behaving "well" as an investor is important. This page summarizes some behavorial recommendations and pitfalls.

  • Let's start on the positive. If you use extremely low cost index funds, select a financial advisor based on reason and not just relationship, don't overpay your financial advisor, rebalance in a smart way, and don't fall prey to behavioral errors, you are going to outperform the vast majority of investors. But it's harder than it sounds, and most people don't do it over the course of a lifetime. (A primary reason I founded One Day In July).

  • Look-back regret can form easily, and it can waste your energy and time. For example: say you pick individual stocks, and you owned Priceline but sold it when it was trading at $8 a share, not anticipating it's rise to $1,400? Or if you owned RIM Blackberry, convinced the Blackberry was on the path to world domination, and it went from $218 to $7. The emotional toll and mental fatigue is large. Buying index funds avoids this "could-we would-we should-we" mental drag.

  • Related to the item above, you will want to do what you should have done two years ago. You'll want to buy stocks when they are high, not when they are low. You'll want to sell when they are low, not when they are high. This inclination to act at the wrong times is destructive to returns.

      "One cannot help being amazed how much money investors repeatedly lost and how violent 19th century recessionary periods were. The most striking characteristic is that they were latecomers to an investment fad."
      - Marc Faber, Tomorrow's Gold
  • Investors suffer from the tendency to want "social inclusion." Since you were a child you have been trained by society that there are benefits to "staying with the herd," that there is protection in a large group of people. You want to buy at the same times, and the same investments, as other people.

  • The human mind tends to overweight near-term historical experiences and underweight the long term. This makes it easy to lose sight of the long-term investment picture.

  • Seth Klarman, a hedge fund manager in Boston, pointed out: if you lose 70% of your money in an investment, emotionally that feels like losing 100%. Think about having $100 dollars and ending up with $30. You are going to feel awful. You are not going to take the attitude of "well, at least it's not zero."

  • It is hard to know how you will behave when a sense of panic builds in your mind. In a severe crash, if you have lost 40% of your assets, you probably won't be thinking "No biggie, I'll just play tennis until the market recovers." You'll likely be reading how the Great Depression is about to return for good, and every major media outfit in the world will be announcing to you that the crash will only deepen. Neighbors may talk about switching to gold bullion, and your wayward uncle may be hoarding food, water, and batteries in his basement.

      "Nowhere does history indulge in repetitions so often or so uniformly as in Wall St. When you read contemporary accounts of booms or panics, the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The games does not change and neither does human nature."
      - Edwin Lefevre, in 1923 (Devil Take the Hindmost)
  • This is purely an observation from my experience. I've noticed that people who have a major investment success early on are in for a rough ride later. The perception in their minds is formed that they can outsmart the markets, and it takes many painful failures for this perception to be reset.

  • Gambling is a powerful force, and the securities markets can be addictive. If you have ever had a problem with gambling, index funds are critical to avoid the temptation of the securities "casino."

      "The psychologies of speculation and gambling are almost indistinguishable: both are dangerously addictive habits which involve an appeal to fortune, are often accompanied by delusional behaviour and are dependent for success on the control of emotions."
      - Edward Chancellor, Devil Take the Hindmost, page xi
  • Jealousy is a powerful force, and investing breeds it. A neighbor who bet on the right small-cap company that soars may start buying luxury cars and fancy vacations. This can influence you to behave the same way, because your spouse is wondering why you're such a chump that you have to go to work everyday. You likely will not reproduce the lucky hit - likely you'll buy high and sell low when you're demoralized.

      "It's not fear and greed that drive the investment world: it's envy."
      - Warren Buffett
  • Financial news channels should be avoided. If you want to be entertained, go to a movie or set an exercise goal. Watching financial news is going to sway your emotions in ways that are not beneficial. If you're on a golf course, try not to talk about stocks. (Talk about this girl who took out a drone with her driver instead).

      "It's no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news. It's also no wonder that the media has ignored those findings."
      - Jason Zweig, WSJ columnist.
  • Politics and investing are a bad mix. Like most of us, you may get emotional when politicians you like or dislike are elected. Tying those emotions to your investments is a risky proposition. There are millions or variables that form securities prices, and the political issue on your mind is only one of them.

  • We're going to end on a positive. We have found that people can train their minds not to worry about finance and the markets. If you pay less attention to the markets, they recede in importance. Honestly you just start to forget about them. Turns out, as this paper showed, not paying attention has benefits!
How We Are Different
Low-fee index funds. Transparent & fiduciary financial advisors.
Local Financial Advisor
We are in your community We are local.
Investment Management
We tailor to each client. Index funds at the core.
About Us: Past and Future
Founded on a simple idea, growing fast.
Dan's Corner
Meaningful musings from our founder.
Fiduciary
Your best interests are our priority.
Low Fees
Our fees are among the lowest in the nation.
Financial Planner
Financial advisor optimizes your financial picture.
U.S. Treasury Bonds
Use Treasury Bonds to reduce risk.
Book Recommendations
Here are some of our favorites
Who We Serve
We work with clients nationwide from all financial backgrounds.
When Should I Invest?
Life transistions = important financial decisions.
Retirement: 401k and More
Retiring? Plan the future you want.
IRA Rollovers
401k Rollovers. IRA Rollovers
Active vs. Passive Investing
We believe there is a winner in this debate.
The Investment Process
How we work: low-cost index funds, personalized attention.
Simplicity
Simplicity is the ultimate sophistication.
Investing: What to Focus On
Low-fee index funds. fee-only advisor.
Switching Financial Advisors
Can be uncomfortable, but an important step.
Advisor Recruiting
We attract top-tier talent. Not your usual firm.
Basic Investing
Let's start with Investing 101.
Understanding Your Financial Statement
Let's break it down to basics.
Index Funds
Broad market exposure, low expense.
Behavioral Finance
Nudge vs. Sludge.
Advanced Investing
Let's geek out on stats, figures, and fundamentals.
How Financial Firms Bill
Fee-based vs. fee-only, and lots more.
Who Supports Indexing?
Bogle, Swensen, Buffett, and others.
Transparency
One click to see our fees..
Mutual Funds vs ETFs
Clarifying the difference.
Does Stock Picking Work?
The resaerch says no.
Countering Arguments Against Index Funds
What happens in a down market?
Annuities
Lots of fees, little clarity.
How Do Mutual Funds Work?
Invest in the basket.
New Client? Anxiety is Normal.
The emotions of the new investor.
Financial Terms Glossary
Common investment terms you should know.
Inflation
Inflation through the investment lense.
Retired Investing
Retiring? Let us help.
Young Investors
Plant a seed, watch it grow.
High Net Worth Investors
Preserve and grow your wealth.
Investing an Inheritance
Prioritizing and planning for the future.
Widowed Investors
Managing money after a loss.
Female Investors
Your voice needs to be heard. We are listening.
For the Business Owner
Choosing what's best for your business.
Socially Responsible Investors
ESG Investing basics.

Why The Name?

Locations

Vermont

New Hampshire

Maryland

United States

Materials

Our Brochure

Advisors: Join Us

Careers

Articles on Investing

About the Secure Act

Quarterly Booklets

Services

Individual Accounts

401(k) Plans

Fiduciary

Resources

Vermont Investment Management

Vermont Retirement Planning

Vermont Wealth Management

Vermont Financial Advisors

Investment Tools

Individuals

Shelburne, VT Financial Advisors

Frank Koster | Josh Kruk

5247 Shelburne Rd, Suite #101

Shelburne, VT 05482

(802) 777-9768

Stowe, VT Finanical Advisors

Steve Schleupner

(301) 514-4499

Burlington, VT Financial Advisors

Hans Smith | Katie Muttitt

77 College Street #3A

Burlington, VT 05401

(802) 503-8280

Portsmouth, NH Financial Advisors

Paul Barry

4 Market Street, 2nd Floor

Portsmouth, NH 03801

(603) 531-3773

Frederick, MD Financial Advisors

Steve Schleupner

(301) 514-4499


Disclosures

© One Day In July LLC. All Rights Reserved.