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MarketWatch November 2017

Mind the Gap: Avoiding the Most Common Investment Mistakes

brian-o-reilly.jpg Brian O'Reilly
Head of Global Investment Strategy

MarketWatch sat down with Carl Richards, the founder of Behavior Gap, to hear his views on common mistakes people make when investing and how they can be avoided.

The Psychology of Investing

This article is from our latest edition of MarketWatch, an in-depth report focusing on the Psychology of Investing.  


Carl Richards  

Carl is a world renowned Certified Financial Planner™ and the creator of the popular weekly Sketch Guy column in the New York Times. He has written a number of financial books and speaks all across the globe on his simple thinking about financial advice. Carl makes complex financial concepts easy to understand through his sketches, and was the keynote speaker at the Davy Annual Conference in 2014. He has also featured on Marketplace Money, Oprah.com and Forbes.
MarketWatch: What are the most common mistakes people make when investing their money?
Carl Richards
: The most common mistake is that we tend to rush in and get excited about buying things after they have gone up, and we want to get out as fast as possible when things are scary after they have gone down.

Which makes sense from a genetic point of view, because it is human nature to want get away from things that cause us pain as fast as we can, and we want to get as much of the things that give us security and pleasure. So it makes sense why we do it, but it doesn’t make any sense when we do it with our investments. That to me is the most common problem.

Another common mistake, which is the underlining reason for these mistakes, is we don’t know why we are investing the money in the first place. We run around spending all this time arguing over whether we should take a plane, train or an automobile on our trip, before we have even taken the time to decide where we are going. Most of us haven’t taken the time to answer this simple question, ‘Why is your money invested the way it is?’ The only right answer to that question is, ‘Because it gives me the greatest likelihood of meeting my goals.’ But that begs the question ‘Have you defined your goals?’

MW: Is there anything investors can do to correct these emotional bias?
: In terms of correcting that problem, what we are really asking people to do is to change their perception of what it means when the market goes down. Is it an opportunity to buy good quality assets at lower prices, or is time to head for the exit and sell everything? History suggests the latter option is a very poor investment strategy.

What we need to realise is that a temporary market pullback is not that painful, which is really hard to do given the panic in the media when the stock market falls. Never forget there are large parts of the investment industry that make money by making us panic.

People should ignore the panic. The reason it’s so hard is that we are asking people to leave their hands on a burning stove! We are giving them facts and figures and saying, ‘no, just leave it there. I don’t care if it’s painful.’ So that’s why it’s really hard to do.

MW: People tend to overextend themselves just before a recession and are often afraid to invest when assets look cheap. Why do you think this is?
That’s true, investors often buy high and sell low. The simple reason is that they are often afraid to invest when the assets look cheap, and are over confident when things look expensive.

Why do I think that is? It’s because just before a downturn, well you don’t know that it’s just before a downturn. You just know that everything feels and looks good, people on the TV are saying the economy is better, your friends are happy. You are hearing about it at the golf club, with your friends at coffee and everybody else is doing it. That’s why we over extend ourselves and get excited, and often buy assets at over inflated prices as a result.

The reasons why we don’t want to buy when things look cheap as you put it, is because they don’t look cheap to us. They look scary. Everybody else is selling. Everybody else is saying things like, ‘Aren’t we going to do something?’; ‘Look at this market.’; ‘Aren’t we going to get out!’ That’s why.

MW: You advocate using a professional adviser to help manage your investments. Why is that?
Yes in my work I advocate using a professional, which I refer to as a ‘real financial adviser’. There is one caveat, however; you have to find one. Good financial advice is hard to find. The industry is full of fake advisers, but that doesn’t mean there aren’t good ones.

The main reason you want a ‘real financial adviser’ is that they will be the buffer between you and the big mistake; like investing all your money in the wrong asset just at the wrong time, like many people did before the global financial crisis.

A real adviser will help you get clear about your values and your goals, and then help you match them. A real adviser will help you match your use of capital with what you say is important to you. Then they will help you behave for two or three decades, which is really hard to do.

They’re an objective third party. I'm not saying people need a real adviser because they are dumb. I'm saying they need a real adviser because they need an objective third party to walk them in off the ledge when they are thinking of doing something silly. I know I do.

MW: What makes a good financial adviser?
This is really important. A real adviser will link what you say is important to your use of capital, both from a budgeting, spending, investment, saving and also from an investment perspective. Your assets should be invested in a way that will give you the highest likelihood of meeting your goals, in other words what you said was important to them. It may sound obvious but most advisers don’t do this, they are more likely to make you keep buying something, and take the commission.

MW: If there was one piece of advice to give an investor what would it be?
If it’s just purely investment advice it would be buy good things and hold onto them for a very long time. You want specifics? Buy a diversified fund and don’t ever sell it! Here’s another one, find a real financial adviser that you can trust and do what they say.



WARNING: The opinions expressed in this interview are the views of the interviewee and do not reflect the views and opinions of Davy.

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