Common Investment Mistakes: Panic
In recent blogs, I’ve been covering the nine basic mistakes I see people make when investing. You can review all nine in our June 2024 blog by clicking HERE. Today we will cover the mistake that I call Panic.
Temporary vs. Permanent Loss
The mistake of panic is made because of one’s inability to differentiate between temporary decline and permanent loss. For instance, when reviewing your financial statement, you see investment values are going down. At the same time, the media is announcing one or more major crises happening around the world. This may cause you to worry that you had better sell it all before the value goes to zero. So, you sell.
Crisis and Emotions
Now, you wouldn’t be human if you weren’t worried about what may happen when a big one comes along like a financial crisis or a pandemic, or when darkness seems to be coming over us with many problems at the same time. Consider, for example, in 1973 we had the oil crisis, President Nixon was being impeached, the Vietnam War, and inflation was at 13%. Or in the early 2000s when the tech bubble burst, Enron went under taking Arthur Anderson with it, the 9/11 attacks, plus an election decided by the Supreme Court.
The emotions we feel during any existential crisis can cause one to panic and make this mistake. Doing so could hurt and possibly destroy your ability to reach long-term financial goals; the most common of which is not running out of money over a long retirement. Each new crisis we experience is different from all the previous ones. Charles Munger, Vice-Chairman of Berkshire Hathaway, said, “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments…You need to keep raw irrational emotion under control.”
Behavior Gap
Throughout history, whenever the “apocalypse du jour” came along, the great companies in America always overcame and continued to innovate and grow their earnings and dividends. Their share prices eventually followed. The Quantitative Analysis of Investor Behavior study from DALBAR showed an investor’s average equity mutual fund return was about 20% less than the average equity fund return over the last 20 years. This is what I call the Behavioral Gap.
We Are Here to Help!
The best, if not the only way to avoid the common mistake of panic is with the help of a competent, caring advisor to guide you through all the fads and fears of a lifetime of investing. Hiring a financial advisor that has the capability to act as a circuit breaker between your emotions and your actions may enhance the chances of achieving your financial goals.
Reach out to the office to schedule a meeting to discuss your concerns!