We like to think we’re rational and make smart decisions — but that’s usually wrong…
For most of us, we do all the wrong things, at all the wrong times. And it prevents us from getting the kind of good results we could get and think we should get.
The following list of money mistakes come from a study of investors conducted by research firm Dalbar. The study is “Quantitative Analysis of Investor Behavior.” This is an annual study that they update every year, that continues to show investors as a group are miserable at investing, and under-perform the market by a significant margin (5+% annualized) on a long-term basis.
In an attempt to understand why this is the case, the study looked at the mistakes investors make.
I know Breakthrough Marketing Secrets is about marketing. And while I create marketing for the investment markets, not all of my readers do.
So why would I include this? Well, because I believe these mistakes reflect something more fundamental than how we screw up investing. They reflect how our minds work. And in that sense, you can see these mistakes repeated all over the place. With other money decisions, yes. But with a little thought, I’m sure you’ll find parallels in other areas of life.
As a marketer, here’s why this is important: These are all the mistakes YOUR PROSPECTS have made, now regret, and are trying to make up for.
If you can connect with their FEELINGS about having made these mistakes, you are able to connect with your prospects on a very deep level. And hopefully, guide them to a better solution.
(I went deep into the power of this — and how to do it, ethically — in my new Emotional Direct Response Copywriting training at BTMSinsiders.)
Here are the mistakes, as presented in a MarketWatch article, coupled with my reaction to them from a marketing perspective…
Loss aversion: The fear of loss leads to a withdrawal of capital at the worst possible time. Also known as “panic selling.”
The secret to getting rich in investing is to buy low, sell high. Most investors do the opposite, because they are always looking in the rear-view mirror for how to make decisions.
We are profoundly influenced by losses we’ve sustained. Other research has found that we respond to the fear of loss at twice the level of the prospect for gain — for the same size difference.
The problem is, we tend to not think about losses until they’ve already happened.
This is why Warren Buffett and other have often repeated the maxim, “Be fearful when others are greedy, and greedy when others are fearful.”
Even better, consider not being reactionary on an emotional level. It’s hard to do, because emotional reactions are our default. But if you can let the emotion pass, follow it by asking yourself, “What is the best course of action in the current situation and moving forward?”
Narrow framing: Making decisions about one part of the portfolio without considering the effects on the total.
When it comes to economics, we almost always have a very limited view regarding the effects of any given decision.
For example, cheap debt leads to increased spending and a growing economy. But that’s always at the expense of the future, so at some point the extra growth today will be offset by reduced growth in the future.
Taking too narrow a view and not looking at the second-, third-, fourth-, and additional-order effect can lead to disastrous consequences.
Anchoring: The process of remaining focused on what happened previously and not adapting to a changing market.
I gave good examples of this above, so I’ll take it in another direction entirely.
Imagine you’re a salesperson, and you’re making calls to prospective clients. You don’t know it, but the next person on your list is actually actively searching for a good solution to the problem your product solves.
But the last person you called just screamed at you. Not only that, they were the fifth person in a row who wasn’t happy to hear from you. And you’re feeling beat. So you step away from the phone, and go grab a coffee.
In the time it takes you to grab a coffee, that next prospect on your list makes a decision to move forward on a competing product, and any chance of a sale you had goes out the window. When you finally call, you get another rejection.
The above is obviously an imagined scenario. Yet it’s an example of what can happen if we’re always looking back, and not anticipating that the next result can be different.
Mental accounting: Separating performance of investments mentally to justify success and failure.
We want to feel like a success. We don’t want to feel like a failure. And so rather than look at our entire picture, we may cherry-pick one or two investments that were particularly good winners. And when we think about our portfolio — and especially when we talk to others about it — we use those as examples of how we invest. When really, the complete picture is dismal.
It’s really easy to cherry-pick our wins, and ignore our losses. And sometimes, that’s helpful. For example, in the imagined example of the sales call above, it may be beneficial to have a memory of a really big sale you can think back on as you’re dialing the next number.
But it also pays to be able to zoom out and do an honest assessment of overall performance, so you can identify opportunities for improvement.
Lack of diversification: Believing a portfolio is diversified when in fact it is a highly correlated pool of assets.
For investors, it’s easy to believe you’re diversified if you’re holding a fund that, for example, tracks the S&P 500 index. After all, that fund may be invested across 500 companies. So the performance of any one company won’t move the needle too much (especially important if, for example, a company files for bankruptcy).
And most of the time, you’ll find that to reinforce your belief that you have a diversified portfolio.
But when the market crashed in 2008, pretty much every major investment asset class crashed together. And if you were diversified across stocks — even internationally diversified — you’d have found that it didn’t really matter.
Herding: Following what everyone else is doing. Leads to “buy high/sell low.”
Good investors will often look to mainstream magazines as a contrarian indicator.
Let’s beat up on Bitcoin.
When cryptos were all the rage in late 2017, they started showing up on the covers of mainstream financial magazines. When that happened, a bunch of really unsophisticated money started pouring in the market. Which sent prices skyrocketing. And reinforced the media cycle.
But… That never lasts. And so smart investors used those magazine covers as their signal to sell. To get out.
The smart investors cashed out with truly epic gains. The herds who piled in when cryptos became front-page news are still licking their wounds.
Regret: Not performing a necessary action due to the regret of a previous failure.
Again, we tend to make decisions while looking in the rear-view mirror.
Imagine if you drove that way. Looking only at the road behind you. You wouldn’t go far before you crashed.
We make many mistakes. The more we try to do in life, the more mistakes we’ll make. Simply getting up and facing the day is fraught with the risk of failure.
The common response to those failures is to give up, to shrink, to do less. This only cements the failure’s influence in your life.
The uncommon response to failure — that leads to success — is to learn from the failure but keep moving forward, simply adjusting course to prevent a repeat.
Media response: The media have a bias to optimism to sell products from advertisers and attract viewers or readers.
As much as we want to avoid loss, we do hope for a brighter future.
And so we will suspend disbelief if the promise is good enough.
We want to believe in the hero. We want the good guy to win. We want to be a part of the grand glory and the story that’s told for generations.
And so we pursue these things and believe these things, and buy into these things — even in the face of contrary evidence.
And so after letting regret hold us back for action when it would’ve been the right thing to do, we finally see that opportunity we’ve been tracking on the cover of the magazine, and we decide it’s finally time, only to… Well, you heard that story already.
Optimism: Overly optimistic assumptions tend to lead to dramatic reversions when met with reality.
Optimism and a positive outlook are a good thing. Except for when they blind you from reality. Then when 1,000 optimists wake up and realize everything’s not as rosy as they imagined, the shock is dramatic and devastating.
Think back to 2006 when everybody thought the price of a house could never go down. That belief kept people flipping real estate, buying property they couldn’t afford, and making all kinds of dumb decisions that only drove prices further up.
In places where this optimism was especially pronounced, real estate prices went to the stratosphere.
Until suddenly, the music stopped.
Credit dried up. Buyers disappeared. And housing prices plummeted.
Be optimistic. But also be realistic. Hope for the best. But be ready for the worst.
Most of my worst investing mistakes are captured in this list…
As are many of my worst business mistakes.
And some relationship and other personal mistakes, too.
One more example, because I fear I didn’t translate this into other markets well enough.
Let’s take weight loss. Diets have been scientifically proven to be bad for you. Good eating habits are good. “Diets” are bad. And yet, we LOVE going on diets.
Take Keto. It’s all the rage.
— Narrow framing has people only looking at weight loss results, and the personal stories of a few people with a vested interest in getting you into keto dieting.
— That’s reinforced in the media, who loves to portray the latest fad diet and its poster children, because they know “dieters” are always in need of a new diet to try (because none of the old ones worked).
— And pretty soon, we all have friends on Facebook who are singing the praises of their keto diet, which has us wanting to follow the herd.
— And our optimism convinces us that “this time it’s different” so we try another diet.
— All the while doing a little mental accounting that lets us ignore the research that says it’s bad for us, in favor of the successes we see in social and mainstream media.
And so we end up making yet another mistake, going on yet another diet that will lead to unsustainable weight loss and more unnecessary damage to our bodies.
Our minds are full of quirks that lead us to make really bad decisions, which simply lead to more regret and shame.
We’re desperate for a real solution.
Knowing this, how can you honor that experience and respect your prospects while offering them a legitimate solution, to move away from their worst mistakes and toward the future they want? Here’s a hint…
Yours for bigger breakthroughs,
Roy Furr
