People’s perceptions of the world are never the same and an investor’s risk profile is often heavily influenced by personal experiences. This is why the investors often pose such a great risk to themselves, since the mistakes they make are based on personal biases and their own behavior.
Being your own worst enemy is a terrifying reality to face, but there is also much to be optimistic about. You may not be able to control the economy or stock market, but you do have control over your own behavior.
To overcome this personal bias, an investor should speak to a large variety of knowledgeable people, especially those with differing opinions from their own. Do your research and question the investment companies you have in mind. The market can be counterintuitive, often irrational and unpredictable. It thus becomes important to expand one’s personal perspectives and understand what drives certain behaviors.
As an example of counterintuitive behavior, consider how people react to an air disaster: Many people put themselves at risk by opting to drive long distances instead of flying, since they perceive it as being safer. Research data indicates that more people have died in vehicle collisions in just 11 days than flying over the past 30 years. In much the same way long-term investors look at short-term fluctuations as a reason to sell, when the data shows that it’s the long-term performance that matters most.
Switching is one of the most destructive investor behaviors and is often fueled by an emotional response to risk. Investment volatility isn’t the biggest risk one faces when investing. In fact, the biggest risk is your actions in response to the volatility. Sometimes what feels like the safer option ends up injecting significantly more risk into your portfolio.
As investors we often ignore the power of simple rules and methods: Don’t spend more than you make, create meaningful diversification in your portfolio and be patient. Most of the time, this is all you need to achieve financial success in the long-term.
This brings us to committing to long-term investment. Patience is the key to long-term success and our emotions can often get in the way. Analyzing the performance of your long-term investment using daily performance data can lead to switching and locking in losses. The market will fluctuate. The one most successful investors have in common is patience.