Investing success relies more on patience and discipline than return on investment. It can also require pain and sacrifice. Yet, many focus so intently on potential returns and trying to predict the future. I would argue that the biggest risk to investing success is investor behavior, not the investment.
If you are suffering from any of the following feelings about your investments, there is hope. If left untreated, these feelings can lead to poor results, falling short of goals, and a lackluster retirement. Morningstar, Inc. prepared a presentation about investor behavior and some of the conditions are listed below.
Investor Behavior: Are You Suffering From These?
- Overconfidence: A recent string of investments that have performed well can lead to overconfidence when it comes to investment selection. This can cause one to focus on the potential upside of investments while de-emphasizing the potential downside.
- Hindsight Bias: There is an old expression that hindsight is always 20/20. According to Morningstar, the definition of hindsight bias is “believing that unpredictable past events, in retrospect, were obvious and predictable.” This can lead to feelings of regret and frustration and negatively effect future decisions.
- Short-Term Focus: If you focus too much on near term events, you risk making short term decisions that can negatively impact your long term results. The reality is that what happens tomorrow, next week, or next month will most likely have little impact on the long term results of an investment. Unless of course you react to it.
If you’re an investor and experience these feelings, there is hope. The sooner you can control these feelings and behaviors, the sooner you can be in control. Most of the things that affect our investments are outside of our control. What you can control is your behavior and how you react. If you focus on what you can control, you are on your way to investing success.
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