Behavioral Finance Video:
BORING IS BEAUTIFUL
Over the past few years, many investments have been hyped by the financial media and several have experienced near-parabolic gains. These include meme stocks, cryptocurrencies, major technology firms, and companies that thrived from changes during the pandemic.
Hype and watching asset prices skyrocket produce a “get rich quick” mentality. This mentality activates our dopamine receptors, which floods us with fear – the fear of missing out on those gains. We experience strong urges to buy, and many of us can’t resist scratching the proverbial itch.
At this point, we are not investing thoughtfully. We are simply reacting to powerful, yet temporary, neurotransmitters firing in our brains. It results in impulsive decisions and impulsive behavior sometimes causes us to watch, in horror, as the security we purchased experiences a precipitous fall.
A History of Booms and Busts
Stocks and other capital assets have a history of going up a lot, a bubble they call it, only to see it burst sometime later. Real estate experienced their bubble burst in the Global Financial Crisis. Many tech stocks “burst” in 2002. But there is a longer history to this.
A study of 13,000 stocks from 1980 – 2014 found that over 40% of the stocks lost at least 70% of their value…and never fully recovered. Ouch! That can make investing seem scary. But we need not fear. The diversified investor was unscathed. During this same period, the Russell 3000 index returned nearly 12% annually.1
Go for Boring
During times like these investors can reflect and learn important lessons. We must understand as alluring as hype and quick gains are, anytime we get excited, we inhibit our ability to think and properly analyze the situation at hand.
Diversification may be boring and may at times leave you feeling left out. But just like the tortoise and the hare, slow and steady can be a great strategy to reach your goals.
©2022 The Behavioral Finance Network
Source: Novel Investor, Nov 11, 2022. https://novelinvestor.com/failing-to-succeed/. Russell 3000 index analyzed and used for performance from 1980-2014. The Russell 3000 index is a capitalization weighted index of ~3,000 stocks and includes large-cap, midcap and small-cap US equities, representing 98% of the value of all US equities. All indices are unmanaged and may not be invested into directly. Past performance is no guarantee of future results