Why Many Investors Fail

Let’s put the disclaimer up front for a change of pace:  This isn’t a research report, or a specific recommendation.  It’s intended as fodder for thought.  Don’t make a decision about your portfolio by relying solely upon this or any other blog post I write.  Consult an advisor you know and trust.  Consider the big picture.

Yesterday I attended a presentation about a new product that seemed pretty interesting.  Based upon my 20 years as a student of markets, I suspect this product will be a failure-not for the issuing company but for the investors who buy it.  It seems likely advisors will recommend the product, and investors will buy it.  I just think that their investment results will turn out to be disappointing at best.  This whole experience really got me thinking about my industry and why investors struggle to achieve good returns.

There are many studies in behavioral finance suggesting that investors tend to make decisions looking backward in time, and they give far more weight to recent history.  I’ve found this to be true, and it usually means that investors don’t want what is good FOR them, but rather what makes them feel good.  Human nature compels us to avoid pain, and seek pleasure.  (Contemplate how few people bought stocks at the depth of the market correction in 2009….)

Meanwhile, in my industry there is this massive “manufacturing and distribution system” of companies and advisors who want your business.  It’s logical that they would make an effort to identify, create and promote what investors want.  Unfortunately, this means that there are a lot of people out there trying to sell you a barn door after the horse has already run away.

See a little problem here?  Investors tend to want what is bad for them, and there are a lot of investment providers who compete on the basis of giving people what they want.  That’s hardly a recipe for success.

Over the years, I’ve encountered many people who have suggested that the odds are stacked against them on Wall Street.  I’m here to tell you those people are probably right, but that it is human nature that makes investment success difficult, not some grand conspiracy.

Here’s a few things you can do to tilt the odds back in your favor:

  • Find an investment professional who understands your needs, understands markets, and who is willing to challenge your assumptions.  Seek out an advisor who encourages you to do what is good for you, not what makes you feel comfortable.
  • Educate yourself – Learn some of the nuts and bolts about how markets work, and about history.  Read a few good books about investments.  I’d encourage you to look for “education” via some of the timeless classics(perhaps I’ll blog about that some time), rather than popular magazines or websites.
  • Think critically.  Question assumptions when they are presented to you as facts.
  • Have a plan – make certain that your goals are clear and realistic, and that you know the time frame when you want to achieve them.
  • Know the “why” – When you are making an investment decision, consider how the decision affects the rest of your portfolio and how it could help you meet your goals.  Be sure that you are making a decision for your long term benefit, not just to avoid pain or in hopes of a quick gain.

It isn’t easy, but (at least in theory) it is simple.  If you can learn to set your thinking apart from the “herd”, you will probably have a better investment experience than them also.

As always, happy to hear your feedback via Twitter (@jpgriffard) or email!

Joe Griffard, CFP®