Oscar Wilde once wrote there is no sin except stupidity. This sentiment could certainly apply to investing. Looking back over investment decisions in our past, most of us likely have had occasion to feel at least a little foolish. Our missteps are often the result of emotion-fueled decisions, rather than sound financial principles, causing us to commit the cardinal investing sins that can negatively affect our financial position.
Investing should always be highly rational; humans on the other hand rarely are. Emotion creeps in, leading us to make choices that are often misaligned with our overall financial needs and goals. It's forgivable to make an occasional mistake every now and then, but striving to avoid the seven deadly sins of investing can help you dodge costly bundlers and help put you on a sound financial footing.
The grass is always greener in someone else's portfolio. We all have stories of a friend-of-a-friend who's lucked out and made the right move, at the right time, on the right stock. With envious eyes we covet their investments, curse our indecision and vow to better their success.
Maintaining discipline, staying the course, and aligning our decisions with our long-term financial goals becomes very difficult when we cease to be an objective investor and instead become a competitor. Remember to focus on your own portfolio not your neighbor's. The decisions you make should be unique to your financial goals and shouldn't be influenced by the actions of those around you.
We know it comes before the fall -- in life and investing. As investors, we want to appear smart, in control of our destiny, and always able to make the right decision at the right time. Unfortunately this often leads us to hold on to an investment until well after we should have sold. We decide to hang in there hoping beyond hope that the tide will turn in our favor, and that our original investment decision will be proven correct.
Sometimes its best admit your mistakes, cut your losses and move on. As an investor we are interested maximizing gains and limiting losses - being right all the time is irrelevant.
Lust can be described as an intense desire or craving. Be warned, it will rarely lead to sound investment decisions. The fact is we all have our desires, whether it's food, wine, ice cream or perhaps our favorite equity, but often our lust for certain investments has no rational foundation. We simple like the company and want to feel a part of it. Remember, there should be no sentiment in investing, if it's not apt to make money, stay clear or cut it loose.
In many ways wrath can be viewed as the opposite to lust; instead of hording investments we irrationally divest, in an angry reaction that quickly rids ourselves of anything to do with the source of our displeasure. Wrath is often born out of short-term thinking, "I was expecting a 10% raise by now." When it doesn't materialize, we sell, without looking at the true potential of the investment and its strategic importance within our overall portfolio. Again, emotion is the enemy -- don't act in anger.
Why do today what you can put off until tomorrow? Sloth is a common sin among investors. Laziness and indifference towards our financial future means that we often fail to take a more active role in financial planning.
The fact is there is no silver bullet, no one all-encompassing decision that will take care of your financial future forever. It's important to regularly review and refine your financial goals, and the roadmap to meet them. Our lives are constantly changing and evolving -- graduating, changing jobs, buying a new house, having kids, moving, retiring -- at each of these milestones we should re-evaluate our goals and adjust our investment strategies accordingly .
Much like eating an entire cake because it tastes so good, it's tempting to overload on a single investment when it's doing well. As with the stomach ache that's sure to follow the final crumbs of the cake, this investment strategy may leave you the worse for wear. Diversifying across a number of investment types such as equities, bonds, cash, alternatives, commodities, etc., can help spread risk, and reduce the likelihood of hardship.
Diversification isn't simply a matter of investing evenly across all asset types -- it's about selecting a position that best matches the risk you are willing to take for the return you would ideally like to receive.
Greed -- the excessive desire to acquire or possess more than what one needs -- is probably the most dangerous investing sin of all. A healthy hunger for returns is one thing, but all out greed can dull our inhibitions, weaken our rational instincts and force us to commit many of the other sins discussed above.
The fact is we should invest to meet predetermined financial goals, but pulling out of an investment once these gains are met can be difficult especially when you can hear greed's wicked whisper in your ear -- "just hang in a little longer and you could have even more." Of course greed fails to inform you that you could also end up with significantly less if the market turns against you. Understanding your financial needs, building a strategy that helps you to achieve them and knowing when to take profits can manage our greedy inclinations.
If you have committed one or more of these sins, remember it's not too late to repent! CFA Institute provides some helpful tools to educate investors on how to make informed decisions. A professional financial advisor, a spiritual investment guide so to speak, can also help guide you through the path of temptation. By removing emotions from your investment decisions you can cleanse your portfolio and return to road to financial redemption.
Robert Stammers, CFA, Director of Investor Education at CFA Institute, is involved in the Future of Finance Starts With You, a long-term global effort by CFA Institute to shape a trustworthy, forward-thinking financial industry that better serves society. The project aims to provide the tools to motivate and empower the world of finance to commit to fairness, improved understanding, and personal integrity. For more info about the Future of Finance initiative check out: http://www.cfainstitute.org/learning/future/pages/index.aspx
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