You Will Fail If You Succumb to Fear – Investing in 12 Pictures
Fear and greed are probably the two biggest obstacles that an investor needs to overcome! Read on to learn how.
Back in 2014, Carl Richards at Behavior Gap was gracious enough to share twelve of his best graphics with anyone who wanted them for absolutely no charge. His hope was that financial advisors could take these images and use them to convey the importance of using a disciplined process to reach your investing goals.
I've taken Carl's images and used them to explain how to systematically approach investing based on these twelve pictures. Hopefully, they will help at least one individual take the necessary steps to reach their personal, professional, and financial goals.
Without further ado, picture number seven . . .
You Will Fail If You Succumb to Fear.
Today’s picture illustrates one of the most critical topics that we will cover in this series. Obtaining a deep understanding of this topic is critical to becoming a successful investor.
I have heard it said by more than one person that, outside of knowledge related to topics on financial planning, the most valuable education that a financial planner could pursue is a degree in behavioral psychology. I could not agree more.
Warren Buffet captured the essence of today’s image with the following quote:
- “Be fearful when others are greedy and greedy when others are fearful.”
And yet when you look at today’s image you see that most people behave in EXACTLY the wrong manner. Here’ what normally happens:
- The market is going gangbusters.
- You feel like you have been too conservative in your strategy.
- You switch to a more aggressive strategy.
- The market pulls back, and you get clobbered.
- The market is in the tank.
- You feel like you have been too aggressive in your strategy.
- You switch to a more conservative strategy.
- The market takes off, and you miss out on the opportunity.
Successful investors do NOT succumb to fear or greed. Rather, they implement a strategy that guides them THROUGH market cycles.
One of the most effective tools in the investor’s toolbox is rebalancing. Rebalancing causes the investor to SELL when things get ABOVE a band and BUY when they get BELOW a band. Notice that this is EXACTLY the opposite of the behaviors described above and illustrated in today’s graphic.
Successful investing requires that you control your emotions. Controlling your emotions requires (i) the knowledge that emotional issues will arise and (ii) that you have a pre-determined approach to guide you through the times when the temptation of emotions emerge.
Fear and greed are probably the two biggest obstacles that an investor needs to overcome. Acquiring the discipline to deal with these two “enemies”—be it through experience, natural personality-makeup, or the support of an advisor —is critical to becoming a successful investor.
Each month, for these twelve months, I will be publishing another picture to help people understand the investment process.
If you have any questions about the topics covered in this post, feel free to reach out to me at any point in time. At F5 Financial, we enjoy working with entrepreneurs, corporate executives, and families to define their goals and make sure they have plans in place to execute and achieve those goals.
Investing in Twelve Pictures - Previous Posts:
- Picture One – You Have to Start With a Goal
- Picture Two – You Need to Focus on What You Can Control
- Picture Three – The Best Solutions Are Simple
- Picture Four – It is NOT a Plan it IS a Process
- Picture Five – Over Time, You Will Learn New Things
- Picture Six – There Will Be Ups and Downs Along the Way
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Illustration credit: Carl Richards (Behavior Gap)
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