In 2012 Bronnie Ware, an Australian nurse who spent years working with palliative care patients, published a book titled “The Top Five Regrets of the Dying.” In her book, Ware revealed five common themes voiced by people faced with their own mortality during the last days of their lives:
- “I wish I’d had the courage to live a life true to myself, not the life others expected of me.”
- “I wish I hadn’t worked so hard.”
- “I wish I’d had the courage to express my feelings.”
- “I wish I had stayed in touch with my friends.”
- “I wish that I had let myself be happier.”
Everyone has regrets in life, but not everyone is willing to own them and learn from them. The investment world is no different. Over their lifetimes, investors allocate time and resources to define, build, and maintain the paths they choose to achieve financial success. Alone or with the help of investment professionals, they make important decisions along the way, decisions that at times can lead to regrets.
Traditional economic theory suggests that investors make rational and unbiased decisions at all times. However, science is now teaching us that investing is more than just crunching numbers, analyzing trends, and making buy and sell decisions on various assets and securities. In recent years, a relatively new field has emerged. Called “behavioral finance,” it studies the influence of human psychology on the financial decision-making process. Its key finding: Emotional irrationality often plays a critical role in explaining many of the investment decisions that lead to regrets.
Let’s look at some of the most common regrets investors have shared with us over the years:
“I wish I had not been buffaloed by information overload.”
Being a long-term investor in a short-term world is tough. Here in the Information Age, investors get bombarded 24 hours a day by forecasts, news, ideas, and tips. Incapable of separating the short-term noise from the long-term trends, some investors make impulsive and frequent portfolio changes. They do so using guidance from whatever sources are most convenient, and focusing on narratives rather than hard data. Other investors react completely differently to information overload: They tend to withdraw from the decision-making process and reduce their efforts when exposed to too much information.
Trust Point’s perspective:
The world is not moving as fast as CNBC or Bloomberg TV would have you believe. What’s more, the most recent information often is not the most relevant—and split-second investment decisions are almost always wrong. If you have a tendency to overreact, remember always to give yourself time to balance the pros and cons before making an investment decision. On the other hand, if you have a tendency to take the path of least resistance and put your investments on “cruise control” no matter what signals the financial world is sending, the answer is to find an advisor you trust, ask questions that will inform you sufficiently (but no more), then make decisions. Be sure to revisit with your advisor at least annually.
“I wish I hadn’t let my emotions take over.”
Studies have shown that pain from loss is at least twice as powerful as pleasure from gain. Out of a fear of loss, the propensity to pay more attention to negative news and act upon it is natural. Worse, if the same negative news is repeated multiple times from different sources, our brains naturally amplify its significance, and we adopt a herd mentality, tending to follow the crowd.
Trust Point’s perspective:
Following the crowd is not a solid investment strategy, especially when it comes to market extremes. When emotions like fear or greed take root, self-control is worth more than a high IQ. Focus on understanding the herd with an independent mind. Stick with your long-term investment plan and resist the urge to follow. Remember that wholesale changes (unless triggered by important changes to your needs or circumstances) rarely pay off. In investing, the best action very often is no action at all. Remember that the investors who were rewarded in the wake of the 2008-2009 bear market were those who did not follow the herd and sell out.
“I wish I had judged success by the process, not just by results.”
Investors often make a judgment on investment success simply by looking at returns. By associating good returns with talent, they become overconfident in their ability to select winners. That leads them to take unwise shortcuts. In the same vein, a pattern of bad performance will be associated with incompetence and can lead to mental paralysis, the inability to take further action out of a fear of further regrets.
Trust Point’s perspective:
Investors deal with the future, and the future is largely unpredictable. This means that a string of short-term wins or losses may well be associated with luck rather than skill. The reality is that individual investors are unlikely to have access to better information, superior analytical skills, or special resources that will lead them to consistent outperformance. The best way to manage the unpredictable is to a have a solid investment plan, diversify, and not let individual winners and losers in the portfolio dictate a new approach to investing. It’s true that even a thoughtful decision-making process sometimes can produce undesirable outcomes, but that shouldn’t lead to regrets. Good investing is like a good diet: It only works if it is sensible and if you are able to stick with it.
“I wish I had overcome my ‘home bias.’”
A relatively recent study from the Spectrem Group shows that a surprising 43% of ultra-high-net-worth U.S. investors (those with more than $5 million in assets) are unwilling to invest outside the United States. Interestingly, the research shows that foreign investors also display a clear preference for investing in their own countries. It appears that regardless of where they live, investors prefer to own assets that they perceive as familiar. Investing in companies that they know or have heard of feels better to them than diversifying into what they see as the unknown.
Trust Point’s perspective:
Myths and misconceptions have led investors to believe that investing close to home is safe, while international investing is risky. The evidence indicates otherwise. The performance of foreign assets is not strongly correlated with performance in one’s home country, be it the United States or any other nation. Therefore, foreign investments add an element of diversification and can actually reduce the overall volatility of a portfolio—while increasing its potential return at the same time. Diversification across and within U.S. asset classes or strategies is great, but no longer enough. Over the past several years, legal restrictions and transaction costs have been eased to make international investing in both equities and fixed income a much more appealing proposition.
“I wish I had paid more attention to costs.”
In life, treating small numbers as unimportant often makes sense, but this is not true in investing. Most investors don’t know how much they are paying for investment services or advice. Worse, investors often think that financial advice from people who are paid through inducements is free. (Inducements are payments, commissions, or kickbacks paid to advisors by the distributors of certain investment products.) If it sounds too good to be true, it probably is.
Trust Point’s perspective:
Discuss fees openly with your investment manager, and understand what services you are receiving for what you pay. Most “fiduciaries” today (like Trust Point) charge a transparent fee based on assets under management. In return for that fee, they may provide a wide range of services to their clients: financial planning, portfolio construction, investment management, tax-minimization strategies, and more. Others (like brokers) may not directly charge you a fee to manage your assets but will get paid through inducements. So be sure to ask about the choice of investments utilized in your portfolio and their embedded fees. At the end of the day, the lower the overall costs, the greater your share of an investment’s return. When compounded over many years, this can have a significant impact on your total wealth.
Good Investing is All About Avoiding Decision Errors
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” –Benjamin Graham
There is, of course, no way to completely eliminate behavioral biases in investing. However, successful investors take the time to understand how emotions affect decision-making and lead to mental mistakes.
At Trust Point, we apply the principles of logic and reason to our investment-decision processes. For example, to maximize objectivity, we have developed a systematic investment selection and review process that helps to overcome emotion during strong up or down markets. Because we believe that time is the most under appreciated element of successful investing, we analyze, discuss, and debate investment ideas and strategies with both our Investment Committee and board members before making choices. That means no split-second investment decisions.
To keep our fees competitive, we use a complete open-architecture structure that combines low-cost, passive investment vehicles and institutional-priced investment strategies. In addition, to avoid any potential conflicts of interest, we do not accept any form of compensation (inducements) from investment managers with whom we conduct business.
In investing, emotion and fees are the enemies. Objectivity and time are your friends.
