Many investors have more at stake, and it's not the time for a misstep.
All investors make mistakes.
We're human.
Maybe that's why we throw money down on a hot stock or salivate over a new ETF. Or why we sell when markets start to slip, even a little bit. Or we don't make any changes at points in our life when we really should.
Over the course of an investor's lifetime, there will probably be too many mistakes to count. The key to success over the long term, though, is to minimize the damage we might do with any single mistake. To recognize where our judgment is faulty and where we need help. And to make enough good decisions to overcome our errors.
With this in mind, now might be a time for investors to step back, before making choices we might regret. With interest rates likely to rise before the year ends, stocks well down from their highs and economic signals showing, well, no obvious signal at all, we might be tempted to make rash, and ultimately unwise, financial decisions.
BIGGEST ERRORS
We like to think about financial markets as being rational — or mostly rational. But they're made up of people, so that's often not the case.
“Human behavior is a complex combination of multiple decision-making systems, of which logical reasoning is only one among several," says Andrew Lo, a professor at the Massachusetts Institute of Technology and chairman of AlphaSimplex Group.
When things get tough, or confusing, we tend to fall back on our less-rational instincts. And when we do that in our financial lives, we tend to make mistakes.
Recently, Natixis Global Asset Management asked 300 financial advisers across the country to identify the biggest errors investors are making now.
Their list of the top seven:
1) Making emotional investment decisions
2) Focusing on short-term market changes
3) Failing to have a financial plan
4) Not setting clear financial goals
5) Not staying on course
6) Keeping too much in cash
7) Investing too little in stocks
SHORT-TERM FOCUS
Let's look at the top two items.
Short-term thinking often stems from a failure to see the big picture. We often don't take into account our higher-priority needs — like retirement or college savings — or our tolerance for financial risk.
And when we don't see the bigger purpose, we fall back on emotions — feelings that seem right at the time. Or we focus on short-term issues, things that seem big in the moment but really aren't.
The reason we rely on emotions — on our instinctive, fight-or-flight reactions — is that we often don't have a framework for making decisions. In fact, an earlier survey of individual investors in the United States showed about half of us don't have a financial plan or set clear goals for ourselves and our money.
What makes today different?
Well, by December, the Federal Reserve is likely to raise interest rates for the first time in nine years.
Financial advisers think the action could have big effects on our markets and economy. Some 58% say higher rates will make bonds less stable. Forty-eight percent say increased rates will hurt stock values (only 30% believe higher rates will be good for stocks). And 40% expect an increase to be a drag on economic growth (only 18% say it will be positive).
We've seen complex, choppy markets before. That's not new.
What is new is that many investors have more at stake. After a good run in the market, more than six years of impressive gains, many investors are fortunate enough to have formed bigger nest eggs. And many who have benefited are closer to retirement or other financial goals. It's not the time for a misstep.
We don't have to make big mistakes now. We can plan. We can remember the long term. We can seek sound, professional financial advice. We can put aside our worst instincts and avoid costly mistakes.
John Hailer is CEO of the Americas and Asia at Natixis Global Asset Management.
