by Rick Baker
On Jan 27, 2011
I know people who retired with a nest egg, had major investment losses, and are now back to the old grind of work.
Backing in to another career or job…that, of course, is something we would like to avoid.
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The other day a friend and I shared stories and thoughts about investor habits.
We talked about many things: the charm of income trusts, the appetite for dividends, pension fund challenges, that reluctance to exit lost-cause stocks, a range of private investments, and the enticing advice provided by next-door-neighbours.
We talked about retired folks who lost a huge part of their net worth when the markets crashed in 2008…very sad stories, in some cases life-changing stories.
All of this raised a few thoughts:
- Emotions, not logic, play a major role when people make decisions.
- Let’s think about the irrationality factor, a component of human nature…how does that fit in and what, if anything, can be done about it?
- Let’s think about knowledge over-confidence, another component of human nature…again, how does that fit in and what, if anything, can be done about it?
Considering this in terms of Good Habits, Bad Habits, & New Things…
Perhaps people will do better at investments if they carve their current investment activity into 2 pieces:
- Investments that pass a Good Habits test
- Investments that do not pass a Good Habits test…and must be classed as investments that are Bad Habits
The first step would be writing out a list of criteria that when combined will become the Good Habits test for investments.
The next step would be sorting through existing investments to determine the investments that will be retained because they pass the Good Habits test.
The next step would be replacing all the other investments with new investments that pass the Good Habits test.
Of course, this requires some self-discipline and some work.
And, the work should be done when:
- emotions are under control,
- knowledge over-confidence is in check, and
- we are 100% comfortable receiving 3rd party advice.