Navigating Emotional Investing: 3 Investment Mistakes That Hinder Financial Success

by Benjamin Beck, CFP® Benjamin Beck, CFP® | June 27, 2024

You may know that I love to spend time in Aruba. It’s where I go to unwind, to spend time with my family, and work for a few weeks each year. I have an office setup, much like home, but with better weather and an ocean view.

I was thinking about Aruba the other day, and I thought, good investing is kind of like Aruba. When it's done right, it feels rather perfect in the sense that it is seamlessly aligned with the long term. When investing is aligned with the lifetime goals of the investor and their family, it’s not attached to outcomes, it’s simply about being there and taking it all in. It’s healthy. It has a feeling of paradise to it. 

If you go to Aruba (or anywhere) thinking you absolutely must have a great time, it stops being that paradise. Similarly, with investing, if you go in expecting a specific return in a specific amount of time, it becomes challenging. But go into it with long term goals that are aligned with your values, let the portfolio remain firmly the “servant” of your financial plan (and not the other way around), and it feels good to be there. There’s an innocence to it. Just like the waves on the beach during a sunrise in Aruba.

What gets in the way of feeling this feeling? We are emotional. We are human beings. That’s what gets in the way of our enjoyment of our financial journey. I thought I’d point out three emotional investing mistakes to avoid for investors seeking long-term financial stability and independence.


1. Falling For Investment Trends

Let’s begin with listening to cable news and other engines of media, all of which are programmed to sell themselves and to benefit their advertisers. The media’s intention is not to help you reach your lifelong financial goal; the media’s intention is to propagate the idea that one can beat the market. The media will have you believe that if you listen to them – (you’re smart, aren’t’ you?) – then you won’t have to be bound by these boring principles of discipline, faith, patience, and commitment. 

They convince you that there are much more lucrative, more exciting things to do with your money than to practice proper asset allocation (make sure to read our posts on what we believe is proper asset allocation and diversification). They have you believe that you – yes, you! – you can outperform. You can do better! And slowly you believe it, yes, I can do better! Why, my neighbor does better! My in-laws are doing better than me! I can do better – you start telling yourself. You forget about what really matters to you, the importance of achieving financial independence during retirement, you forget about providing for your kids and grandkids, you forget about generational wealth. You forget about all these true goals, and the only thing you have in your head is the markets, as you throw yourself into the pursuit of outperformance.


Are You in the Danger Zone?

If what I am describing here sounds even a little bit like you, I want to warn you that you are in the danger zone. You are about to stumble into the mother of all investment mistakes. You may even be giving into that temptation, giving into human nature, to do exactly the opposite of what is good for you. You may be forgetting why you started investing in the first place. You may have lost sight of what you know is true.


2. Overlooking Sound Financial  Guidance  


Impulsive Reactions to Market Volatility

So what do you do? You call your advisor! You say, “My God, are you looking at what’s happening here, what is going on?” “If you knew interest rates were going to go up, why didn't we get out of utilities well before that and go into something else?” “We should be switching asset classes, market sectors, or even countries. Shouldn't we be in international right now?” And then you say, “What are you going to do about it?!” You urge your advisor, “We have to do something different, do something, anything!” DO SOMETHING..

Beware of falling into the trap!

Conversations like these are part of our work. In fact, I’d say they are not part of our work: they ARE our work. Our work is to help you manage your emotions around money. When a client says, “I’ve lost so much money over X, Y, Z period of time,” I am inclined to question that perspective. Is it true? Have you lost anything, or has your portfolio simply declined for a temporary amount of time? Because if history is any indicator, over long periods markets recover. What’s really going on is not that your portfolio is down. No, what has really happened is that you have fallen into the emotional trap – largely because of the attention you pay to the news.


Media Influence on Investor Behavior

Most Americans – most of our clients – get their financial input from the news media. Financial journalism thrives on the assumption that you should be trying to beat the market at any given moment. Select the mutual funds with the highest returns. Time your ins and outs of the markets! This is what sells. It sells the media.


3. Attempting to Time the Market 

Turn on CNBC (or your favorite news channel) right now. I'm sure there's a chart front and center that tells you all things you should be switching into and out of, in order to avoid the pain. All the things you have to do to outperform.

It is madness and it is delusional.


The Realities of Market Timing

Forget about the fact that consistent outperformance through market timing – meaning actively selecting, moving in and out of sectors on a regular basis, timing the economy – is not even possible. Don't take my word for it. Just check out anything that Warren Buffett has said, Charlie Munger, or any other timeless, uber-successful investor. Set aside the fact that all these legendary investors don’t believe in market timing.

It's not important whether someone has the formula to market timing. What’s important to note is that marketing timing is irrelevant. Outperformance is irrelevant. Outperformance is not a financial goal. What is a financial goal? A financial goal is, for example, an income that you cannot outlive throughout 30+ years of retirement. It’s the independence and financial dignity you’ve worked a lifetime to achieve. It’s writing a check to your child for $75,000 or $100,000 so that you could help them and their spouse and perhaps their children put a down payment on their first home. It’s helping grandchildren with their education costs. These are all financial goals.

But being focused on how you’re doing compared to the S&P 500, the Nasdaq, or the Dow over the last nine months? Is that a financial goal?! No, it is not.


Staying the Course: Goal-Based Investing for Long-Term Financial Independence

If not market-timing, then what?

Goal-based investing provides our clients with a basis, a foundation on how to act, to achieve the financial independence that they've worked hard to create, or they are already retired, how to act so that they can stay financially independent throughout their lifetime.


Resisting Market Fads and Fears Of The Moment

Portfolio-focused or market-focused investing leaves you to react to all the fads and the fears of the moment. You see, you react to the markets, but you don’t react to your financial independence. You don’t react to your most cherished goals. You don’t time your way to your dreams. That would be ridiculous. If any of our clients, or any of us at Beck Bode for that matter, at any point even gives the slightest impression that we are market driven in terms of our decision making, then we have led our clients astray. I say this because I know that market-timing is not consistently achievable.


Practice Patience and Discipline

Our guidance to our clients is to stay put. I know, it's boring, but patience is perhaps one of the rarest qualities there is in any aspect of life and most certainly in the investing world. I can't blame any of us for always wanting to achieve superior returns. But it is our job as financial advisors to advocate constantly and consistently for what is the most essential characteristic of a successful portfolio, namely your most deeply cherished financial goals. And to achieve that, we don’t change focus, we don’t “move into something else for the time being,” or because we are heading into a high interest rate environment.

Instead, we summon, promote, and advocate for discipline, patience, and faith. Because those are the qualities that are necessary for success.


Ben Beck, CFP® is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business, and life.

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