Each day investors nervously monitor world events, wondering which wars, election results, natural disasters or other happenings beyond their control might cause the market to soar – or stumble.
More than people realize, though, their financial future also hinges on something they can control, but too often don’t: their own emotions.
“When people don’t have discipline combined with a financial plan, they let their emotions dictate their decisions,” says Jason Labrum, founder and president of Labrum Wealth Management (www.labrumwealth.com) and author of Financial Detox: How to Steer Clear of Toxic Advice, Achieve Financial Independence and Manage Your Wealth for Maximum Impact.
“Emotional decisions, especially when it comes to money, are almost always costly decisions. Unfortunately, there are numerous psychological traps, misconceptions, and triggers that cause investors to act irrationally, which leads to buying and selling at the wrong time.”
He says a few of those behavioral blunders include:
• Loss aversion. Some people are so worried about taking a loss that they are afraid to put their money to work for them. “Yet somehow they expect to enjoy high returns with low risk,” Labrum says. “It just doesn’t work that way.” Certainly, risk tolerance varies from person to person. Some people can take great risks and not lose a wink of sleep, while others toss and turn with moderate risk. But if you keep all of your money in safe places, you’ll miss out on great opportunities for your portfolio to grow, he says.
• Diversification. Investors know they need to diversify – which is a good thing – but the blunder is in how they diversify, Labrum says. They seek to reduce risk simply by using different sources that don’t necessarily provide real diversification. For example, they might put their money in two mutual funds that do essentially the same thing.
• Herding. Parents routinely warn their children to be wary of following the crowd, yet many investors do just that when they make financial decisions. They copy the behaviors of others, even in the face of unfavorable outcomes. The crowd may very well be right, but you’ll want to do a little investigating on your own before making an investment just because it’s the trendy thing to do.
• Media response. Sometimes you just need to turn off the TV and go enjoy your life, Labrum says. Too often, investors react to the news of the day. “You want to stay informed,” Labrum says, “but you don’t want to get so caught up in what pundits are saying on news show that you let fear or greed rule your actions.”
“The behavioral blunders people make destroy returns and, as a result, they destroy your wealth,” Labrum says. “It’s sad because these blunders can cause people to lose a lot of money that would have benefited themselves and their families.”
About Jason Labrum
Jason Labrum has been helping individuals, families and businesses with financial planning, portfolio management and business retirement plans since 1998. Jason spent 12 years at two major financial firms and in 2009 founded Labrum Wealth Management (www.labrumwealth.com). He also founded Financial Detox® which is a consumer education brand, radio show on KFMB in San Diego, Podcast. Jason recently finished his first book also entitled Financial Detox® – Achieve Financial Independence and Manage Your Wealth for Maximum Impact. Jason is a dynamic speaker who isn’t afraid take on Goliath when it comes to wall-street and bad financial advice. Jason’s persistent attack on advisor and investor apathy which leads to behavioral blunders could save you hundreds of thousands of dollars if not millions.
