Own Worst Enemy?

Yahoo Finance reran an article from the WSJ that looked at some of the ways that investors are their own worst enemies. The article interviewed a few financial advisors for anecdotes so there was only the one point of view but we all know about various behaviors that people collectively seem to repeat over and over that greatly impedes long term success.

This raises an interesting question about whether people should either go all in in terms of time spent monitoring markets and research investments or go all out and hire someone. The dichotomy is is of course false as there are not enough advisors to accommodate every disinterested 401k investor and one of the behaviors we are talking about is the lack of self awareness by some portion of the population that they are doing a bad job and need to make a change.

That may seem harsh but I think the portion of people who actually do not learn from their mistakes is not that high. What might be higher is the people who learn from their mistakes but the fix turns out to be wrong as well. For example the person who realized they had too much in equities at the wrong time (like early 2009) who then does not simply reduce equity exposure but instead eliminates it.

Every so often I am asked what books someone should read and I always include something that addresses behavioral issues and otherwise teaches how to think effectively. The starting point is probably an understanding that people's fear and greed (or any other emotions) causes bad decisions to be made like buying high when everyone is excited or selling low when everyone is terrified. Also included is forgetting what large declines feel like or forgetting that certain "great" asset classes can sometimes implode--here I might include closed end funds or MLP/royalty trusts as examples.

While it may not realistic to totally overcome every behavioral quirk, awareness of these quirks can help with overcoming some of them or reducing the instances of getting caught succumbing to behavioral quirks.