There’s a human side to investing, and understanding it can make a big improvement in your returns, while lessening risk.
We all like to think of ourselves as rational, discerning, and clear-headed—and, at least when it comes to investing, not just anybody’s fool. Many drives, fears and desires are involved in investing, however, much as in eating or in relationships with other people. When choosing investments, in fact, investors seem to seek all those conscious and unconscious goals that fill today’s talk shows—comfort, pain, self-fulfillment, challenge, prestige, self-esteem and so on.
Investors do buy investments for good reasons, of course. They also buy to avoid being left out of a good thing that others are in on. Investors also sell for logical reasons. But many sales take place too soon, simply because investors want to reward themselves with a profit, regardless of the profit’s size, or the outlook for an investment.
Or, take the ‘gold bug’—a stereotype that really does exist. Genuine gold bugs like to view themselves as realists and students of human nature. Their views may start out that way, but many take them to extremes. They wind up losing all trust in government, business and people generally.
Some investors, however, are reasonably trusting of others, but lacking in faith in themselves and their own judgment. We’ve met a few who take this lack of self-confidence to such extremes that their portfolios include up to 200 individual securities. This insures that no single bad choice can hurt them, of course. It also ensures their best picks will have minimal impact. It also fritters away their awareness and intellectual energy.
Betting on a sure thing
When you seek false security in your investments, you’ll find many advisors and promoters who are all too happy to oblige you with a steady supply of ‘sure things’. But a high failure rate in sure things is one of investing’s few certainties.
Eventually, many investors switch tracks. Instead of seeking certainty and precision, they begin to go after investment quality and diversification. Instead of trying to predict the future, they settle down into tackling the more easily mastered task of deciding on one’s own appropriate investment objectives. Then they choose investments that are likely to help them attain those objectives, while limiting risk.
Living with human weakness
To prosper as an investor despite your all-too-human weaknesses, you have to learn that hardly any investment is ever a great buy or a strong sell for every investor. Finding investments that are right for you begins with developing an appropriate and realistic set of investment objectives.
You’ll need to consider your age, your resources (current and future), and your temperament and personal strengths or weaknesses. Generally speaking, young people and those nearing retirement need to be especially aware of risk.
Young people lack the experience that makes them able to assess risk—to spot a scam when they see one. When nearing retirement, however, most investors need to be more careful, because they have less time to replace lost capital.
Understanding your temperament and personal strengths or weaknesses will help you set investment boundaries for yourself. It might, for example, be appropriate for a geologist to speculate occasionally in penny mining stocks. But that sort of investing would rarely be appropriate for cautious, less informed, investors.
Either way, you should balance and diversify your portfolio between stocks on the one hand, and fixed-return investments on the other. Then, diversify your stocks among the five economic sectors—Manufacturing, Finance, Resources, Utilities and the Consumer sector.
You’ll still need to examine each of your investment decisions before you carry it out. But if you pay close attention to quality, and aim at a diversified, balanced investment portfolio, you’ll make a big improvement in your long-term prospects for profit.
This is an edited version of an article that was originally published for subscribers in the November 6, 2020, issue of The Investment Reporter . You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter .
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