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Don't Try to Predict Your Own Behavior

  
Analysis, Education
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“It’s easy to see, hard to foresee.” ~ Ben Franklin

How often have you accurately predicted your reaction to emotion-provoking events in your life?

When the stock market gets volatile as it has been in recent weeks, I am reminded of the irrelevence of risk tolerance questionnaires.  If you’ve ever sat down with an investment advisor or financial planner, you’ve likely seen or heard the questions that try to predict how you might react in various stock market scenarios. 

For example: 

“If your investment portfolio were to fall by 20% in the course of one year, how would you react?  Would you A) Do nothing, B) Wait a few months to make a decision, or C) Sell your stocks immediately?” (more…)

Coast is Clear

  
  Education
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1. Swear off the stock market forever. Look, the reality is that making money in the stock market is hard. Most of us just don’t have the emotional makeup to do it. That’s OK. If during the last 10 years you’ve found yourself making big behavior mistakes over and over, then stop. You might be  better off just committing yourself to a life of owning only certificates of deposit, given how poor your stock returns could be if you trade too much.

2. Act like you have a blind trust. Find someone you trust, give them your money, tell them to buy you an index fund and then have them update you again in five years. This could be a financial planner like me, but you could also enlist a trustworthy friend who won’t charge you anything for the privilege.

I know that there are people who have been successful, people who behaved correctly. If you are one of them, congratulations and keep doing what you’ve been doing.

But we have to recognize that the way most of us have been doing things hasn’t worked, and it probably won’t work in the future.

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