For the past 40 years, I’ve spent most of my day helping people with investing. The conversations have been as varied as the people sitting across from me, including teachers, doctors, lawyers, janitors, business owners and just about every other vocation you can imagine. While their circumstances and needs varied, there’s one aspect that remains consistent across generations, vocations and wealth levels: behavior.
My experience has taught me that an investor’s behavior is a far greater tell of investment success than nearly any other characteristic. Your behavior tells me everything I need to know to help you work toward your financial goals. Good behavior doesn’t mean pinching every penny or saving every dime. Instead, it includes asking for advice when you don’t know, heeding the advice you receive, and personally taking action or finding the right people to put that advice into motion.
Those who are students of their behavior — and of their mistakes — have the opportunity to improve their behavior and outcomes. I will share an example.
I met a gentleman named Ted at a conference in early September of 2021. Ted had been a facility manager for a large organization for several decades. Almost 30 years ago, he and his wife sat down with a financial adviser and sketched out a basic plan. This plan, presented in a three-ring binder, outlined a few simple rules — which if followed, offered a shot at a retirement well beyond what they thought was possible.
The rules were simple:
● Avoid debt.
● Save in retirement accounts.
● Don’t be greedy.
● Don’t spend more than you make.
Even after raising four kids, putting them through college, paying for their weddings, and generally “doing life,” they stuck to those basic rules. Today, they have about double the money the advisor thought they’d end up with. With that, they have choices, flexibility, and a lifestyle that will keep them comfortable for years to come. They asked for advice, listened and acted. Their good behavior allowed the power of compounding to work for them.
My new book, “Blind Spots: The Mental Mistakes Investors Make,” focuses on one simple idea: that your behavior as an investor will impact your financial future much more than asset allocation, degree of diversification, or even security selection. How you respond to situations and react to events, and your emotional IQ, will ultimately dictate your success at long-term investing.
Behavior reflects emotions, which are like an invisible muscle, always at work. Exercising my physical muscles with weights or repetition will grow them into something stronger and more adept at handling even more resistance. Your emotional muscles work the same way. Trial by fire and tough situations will help to strengthen your resolve, confidence, humility and ability to keep a cool head in trying times. Whether that’s a divorce, an unexpected death, a welcomed windfall, or a challenging disability, an emotional situation both good and bad will test your emotional aptitude. As the adage goes, the hottest flames forge the hardest steel.
If you rewire your thoughts to change your behaviors for the future, the emotional strength you can build in these situations becomes empowering. When you can look back on and learn from your experiences to better manage current situations, you become much stronger than the person blindly allowing emotions to run their life.
Building emotional strength, however, involves more than just withstanding hardship or making mistakes. It requires reflection to understand your temperament. This includes knowing your strengths and weaknesses — what you’re good at and where you fall short. It also involves knowing your boundaries or limitations. Emotional strength, gained in this way, is the foundation of good behavior, and arguably of financial success.
My aim as an adviser is simple: I want to encourage people to improve their investment behavior in order to become better investors. This involves recognizing when emotions like fear or greed distort judgement. When emotions are managed, good behavior can lead to fewer mistakes and much better investment decisions, which in turn can bring more freedom, confidence and returns — making your money work for you and your family, possibly for generations to come.
I wrote “Blind Spots” for those who want to be students of their behavior. Maybe you’ve made poor decisions in the past: buying at the top, selling at the bottom, chasing a losing investment, or selling a winning investment too early. Maybe you’ve let emotion override logic and want to better understand why that happened and what you can do to prevent it in the future.
At times, fighting your emotions will feel like fighting gravity. Like the fish not realizing he’s surrounded by water, your emotions make up who you are. They can steer you in new directions, challenge the status quo, or sap your desire to get out of bed in the morning.
Yet the more you recognize your emotions and reconcile them with your long-term goals, both financial and otherwise, the more successful you’ll be in working toward them. Understanding your emotions doesn’t mean conquering them. It means practicing introspection enough to realize when your approach simply isn’t suited for investing. For those situations, utilize a coach who can work for you and with you to seek a better result. You are your emotions, your behavior, and your future. Improve your investor behavior, and see the effect it has on your life.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Blind Spots: The Mental Mistakes Investors Make” and “Intelligent Investing: Your Guide to a Growing Retirement Income.” He was named by Forbes as a 2021 Best-in-State Wealth Advisor, and a Barron’s 2021 Top Advisor by State. This column is not intended to provide specific investment advice or recommendations.
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