We’re All Human
Choosing and following an investment strategy can be challenging for all sorts of reasons, but many times the most challenging of obstacles are a direct result of the one thing we all have in common. We are human beings.
As humans, we have the potential to be the biggest threat to our own savings and retirement futures. Our ability to make discipline driven, rational decisions is heavily influenced by our biologically emotional nature and our irresistible urge to identify and project patterns and trends into the future.
While markets are advancing, we tend to think the good times will continue, and when markets crash we tend to see no end. When we project these trends in a good market, we become exuberant, excited, greedy and reach for more return. When we project in a bad market we see our retirement, life savings, and quality of life disappearing before our eyes. Both of these situations ignite even the most apathetic of investors, why? Because we are human.
This may sound obvious, but it is of utmost importance to do what we can to avoid getting caught in situations that make achieving our financial goals more difficult. Doing this is not always as easy as it sounds. Here are a few ways to help minimize exposure to yourself.
Making sure your portfolio is matched to your individual tolerance for risk is one of the most important things you can do as an investor. I say individual, because this can mean entirely different things to different people and can depend on a variety of variables, including your age, income, net worth, liquid assets, cash needs, and a whole host of other characteristics.
If you have a portfolio that is correctly matched to your risk tolerance, you can substantially reduce the likelihood that you will find yourself in a situation where your emotions are in control of your decisions. It is when people allow themselves to migrate outside of that risk tolerance that can lead to panic, and fire-sale liquidation of assets at precisely the wrong time.
Next, take a longer-term view of your performance. Getting caught up in the day-to-day, week to week or even month-to-month volatility of your portfolio can amplify the voices in your head and cause you unnecessary angst. Look at your returns relative to your goals, are you on target? Are you earning the income you need? Are you taking the appropriate amount of risk for your personal situation and level of comfort?
It may not sound glamorous, exciting, or thrilling, but being aware of your own emotional pitfalls as a human and avoiding risk creep and costly mistakes many times means the difference between winning and losing the race.
Past performance does not guarantee future results.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.