Investors are prone to periods of underperformance regardless of strategy. The response to underperformance is an important consideration for the investor's future success.
Have you experienced these unfortunate investor conditions?
Catching a falling knife: This trap, often experienced by value investors, results in throwing good money after bad for an investment that is falling fast. Investors want to buy when undervalued, but companies on their way to bankruptcy can be deceptively alluring to those looking for a bargain.
Revolving door for your strategies: Some investors stick with a process until it doesn't work and then look for a new strategy. This can whipsaw you. The rear view mirror may not be indicative of an investment’s future and you might chase performance that is difficult to replicate going forward.
Head in the sand: Buy and hold investing certainly has its merits. However, an investor ignores their portfolio altogether at their own peril. Things can change in the investing world as with other places. An investor inherits AT&T from their grandmother and Ma Bell breaks into tiny pieces while telecom is revolutionized. This leaves a variety of investment implications that Grandma could never have predicted.
What's the antidote to these investment pitfalls? Nobel Prize winning behavioral psychologist points to process:
"Organizations are better than individuals when it comes to avoiding errors, because they naturally think more slowly and have the power to impose orderly procedures." ~ Thinking, Fast and Slow, Daniel Kahneman, 2011.
At Center for Financial Planning, we have an investment committee dedicated to upholding the very processes that hedge us as investors from common pitfalls while maintaining customized financial planning solutions for each client's unique situation. There are checks and balances so that changes for investments don't occur willy-nilly. Parameters anticipating discussion of process change are documented within our written procedure.
Process takes discipline and commitment. It's a fundamental prerequisite for successful long-term investing helping to avoid mistakes of the common investor.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.