Are You Chasing Money? Part Two: Investing

"If every time I open the financial pages, I read 'Exxon is up,' my limbic system thinks that Exxon always goes up."  -- Harvard economics professor, David Laibson

Yesterday, in my Blog post, "Are You Chasing Money? Part One: Personal Finance," I spoke of getting out of "the rat race."  As it turns out, those furry little creatures have found their way into the world of investing as well!

According to Laibson's study at Harvard, our primitive brain, or so-called "rat brain" is hard-wired for financial failure, especially when it comes to investing (no offense to our furry little friends, of course).   The study says that our rat brains love "heuristics"-- mental shortcuts that link patterns to potential rewards.  Conversely, our rat brain is wired to avoid potential threats.  When a particular investment is performing well, our rat brain will look for that investment to continue its high performance.  When a particular investment is performing poorly, we begin to feel the urge to sell.  In summary, our brains want to buy high and sell low with regard to investing -- exactly the opposite of what we should do!  Here again, the average investor is "chasing money" or what I often refer to as "chasing performance."

At the very least, you can stop kicking yourself over all those investment mistakes you've made in the past.  You can blame it on your "rat brain!"  You should, however, take steps toward preventing those mistakes again by taking some simple steps to "outsmart" your brain:

• As with yesterday's Blog entry, you will need to start with yourself .  Go ahead and admit that the odds are stacked heavily against consistently outperforming the market.   To my knowledge only two human beings, Warren Buffett and Bill Miller, have been able to consistently beat the S&P 500 for more than ten years.  Once you get up to 15 or 20 years, only about 10 percent of managed money can outperform the broader market.  Do you think you can match or even outperform Warren Buffett?
• Set it and forget it!  Make your investments (and your life) more simple by using target-dated funds, also referred to as "life-cycle" funds.  The idea is that you can invest all of your money in one mutual fund that is allocated in a way that is appropriate for your investment time frame or target date.  I like Vanguard's Target Retirement Funds.  For example, if you are in your forties and you are saving for retirement, it is reasonable to expect you can retire approximately twenty years from now.  By investing all of your retirement assets in the Vanguard Target Retirement 2025 fund, you will be exposed to an asset mix of approximately 80 percent stocks and 20 percent bonds, spread among a diverse mix of six Vanguard index funds and one Vanguard Exchange Traded Fund (ETF).  The manager will then shift the assets more conservative as the year 2025 draws closer.  No more research.  No more trading.  No more discipline.  No more chasing money!
• Of course, you would expect me to say that using a good "fee-only" adviser is another approach.  I always tell clients and prospective clients that an adviser's greatest value to the investor is protecting them from themselves.  As an investor, your greatest risk is you...

Would you hire you as your investment adviser?

Kent Thune is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston.  ACI specializes in retirement, investments, and comprehensive financial planning.