Do you remember playing pretend when you were little? Maybe you were a superhero, a dinosaur or a princess. It’s normal when you’re little, and it’s usually harmless. Most children know the difference between pretending to be a superhero and jumping off the roof thinking they can fly.
But adults often forget.
For instance, we may stop pretending to be superheroes, but a lot of us seem convinced that we can pretend to be investors. That’s dangerous.
- Pretend investors think that financial pornography is real, so the ticker tape scrolling across the television screen all day represents actionable information.Real investors know it might be entertaining, like going to the circus, but they would never make a decision because of it.
- Pretend investors think it makes perfect sense to change their investments based on what they hear in the news: There’s a new president, so act! He doesn’t like the Federal Reserve, so trade! He criticized bankers, so buy bank stocks!Real investors know that they make changes to their investments based on what happens in their own lives. If their goals change or there is a fundamental change in their financial situation, then they consider an alteration. But they would never make a change based on someone yelling “buy” or “sell” on television.
- Pretend investors think they need to monitor their investments all the time. The little supercomputer they carry around in their pockets makes it so easy.Real investors know that it takes a long time for a tree to grow, and it will not help to dig it up to see if the roots are still there. The same rule applies to investments. And because watching things get big slowly is not very exciting, real investors tend not to talk about that tree all that much.
- Pretend investors talk about their investments — a lot. They say things like, “I’m long this, or short that.” They use jargon that often does not make sense, though it sounds kind of impressive if you don’t listen too closely. Sometimes they cheer for things like increased consumer spending, higher unemployment, or in some cases, war.Real investors understand the difference between the global economy and their personal economy and choose to focus on the latter.
- Pretend investors will worry endlessly about the news in some far-off part of the world or the impact on their portfolio.Real investors focus on the things they can control, like saving a bit more next year, keeping their investment costs low, not paying fees unless it’s necessary and managing their behavior by not buying high and selling again when prices are low.
- Pretend investors complain endlessly about volatility in the market and external actions that have short-term impact on the big bets they have made on individual stocks.Real investors have enjoyed the benefits of a market that is up more than 180 percent in the last 20 years.
So ask yourself this: Isn’t it finally time to stop pretending now?
SOURCE: BEHAVIOUR GAP