Investor behavior is something that has always intrigued me because it is so emotionally driven and is such a mind game. The average investor does absolutely everything backwards and their psyche is disrupting their retirement!
Most people love a sale! Heck, the majority of people I know brag when they get a good deal. I always hear people talking about getting the best of a car salesman or being at Macys at the right time to get 70% off a Coach purse. Folks get a real thrill over finding the deal of the century on most things.
However, when it comes to investing, people want to do the exact opposite. No one wants a sale. Everyone wants to buy when things are good or when the markets are high. If it was up to individual investors they would buy at market highs and sell at market lows. (I personally worked with a woman who had $140k in her retirement in 2008 and waited until February 2009 to sell. Her portfolio went down to $65k and she never put it back in the market. This means she missed out on about a 50% increase in the markets!) These stories are all too common!
To give you hard evidence about how investors react here are some good numbers. During the peak of the financial crisis (Oct. 2008-March 2009) investors pulled out over $40billion from their investments. The markets started to turn in April 2009, but investors waited until 2010 until they started investing again! This means they waited until things looked good again…ugh! They pulled out when the markets went down below 7000 and waited until they were over 11,000 to invest again. UNBELIEVABLE!!!
I think we can all take advice from the great one – Warren Buffet. He said, “When the markets are greedy be fearful; when the markets are fearful be greedy.” These are great words to live by. You need to take the emotion out of your investment decisions. Understand the risks, create a diversified portfolio, rebalance once per year, and sit back and laugh at everyone else! Making money in the markets isn’t hard; it just takes time and patience! Get control of your psyche and your investments will prosper!