It has been nearly five years since the
depths of the U.S. financial crisis, and investors have learned a lot
since then. Or have they?
Despite the
downturn that left many investors reeling from losses on everything from
real estate to the stock market, when it comes to investor
behavior—those hard-wired instincts that drive us all—little has
changed, say psychologists and financial advisers.
Investors
still make the kinds of mistakes that have gotten them in trouble for
decades. They are wooed by the hottest new trend, they want to follow
the crowd—consequences be damned—and they just can't seem to pay enough
attention to important details, such as the steep annual fees charged by
many mutual funds.
"When it comes to
money, we are operating as if we were in the jungle, having to deal with
predators like tigers," says
Brad Klontz,
a clinical psychologist and associate professor of financial
planning at Kansas State University. "We have a caveman brain."
There are ways to avoid these
pitfalls. Investors need a hard and fast plan of their investment goals,
they need to find a trusted adviser or family member to help weed
through decisions and they need to stop paying so much attention to the
short-term events that drive media coverage.
Here are the seven deadly sins of investing, in no particular order, and how to protect against them.
Lust: Chasing Recent Performance
The
belief investors feel that recent performance will dictate future
performance—known as "recency bias" in psychology—is one of the biggest
investor pitfalls, experts say.
"People tend to buy something that has done really well recently," says
Terrance Odean,
a professor of finance at the Haas School of Business at the
University of California, Berkeley. "They chase performance."
In
the lead-up to the financial crisis, investors dived headlong into
real-estate investments, convinced that rising housing prices would
never falter.
