The Pax Financial Blog

How to Invest Smartly: 5 Ways To Avoid Investment Deceit

Financial Planning Feb 9th, 2018 by: Darryl Lyons

In a study performed by behavioral finance expert Richard Thaler, two groups were given hypothetical portfolios. One group received performance feedback monthly, while the other group received performance feedback annually. The monthly group received negative reports 39% of the time. The annual group received negative reports 14% of the time.

 

When Thaler asked the participants at the end of the study, "How would you invest your money?" the monthly group said they would only put 40% of their money in stocks while the annual group said they would put 70% of their money in stocks.

 

In other words, the monthly group became scared based on the frequency of seeing more volatility. This fear deceived them and impacted their investment approach.

 

Here are five ways you can avoid being deceived:

 

1. Don't reference the high-water mark in your investments every time you look at a statement.

In other words, don't say, "It was at $X and now it’s down to $Y – I'm losing money!" High-water marks are nice, but they should not be the permanent point of reference. Go back to your initial investment to have a reference point.

 

2. Look at your investments less frequently.

The maximum you should review your long-term investment plan is quarterly. Daily watching may lead to high blood pressure.

 

3. Don't assume that everyone is making money and you aren't.

I heard the other day from a client, "My friend put all his money in stocks and is making a ton of money!" I pointed out that his friend could be lying. I could be wrong, but I have yet to meet someone who put 100% of their money in an undiversified portfolio and timed it perfectly. It's important to also keep in mind that diversification cannot assure success or protect against loss in periods of declining values.

 

4. Don't assume the grass is greener.

I hate it when a client moves from one institution (even if it's to me) every three years. There could be fees to move and, even worse, a consequence of giving up on a strategy too early. An early exit out of domestic stocks in 2009 based on the threat of government shutdowns caused many Americans to miss out on potential opportunities of a bull run.

 

5. Avoid anything that doesn't have evidence.

Evidence is not only important for making wise decisions, it's even more important to reference when times get scary. We prefer to use strategies that have a 10-year track record. It helps us better understand how an investment may behave if things get disruptive.

 

I believe if you follow those five investment strategies, you will avoid deceiving yourself and have a better long-term investment experience.

 

 Retirement Guide - PAX Financial

 

This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.  

 

Darryl Lyons

Darryl Lyons

CEO and co-founder of the PAX Financial Group, Darryl Lyons has been a licensed professional in the financial services industry since 1999. A lifelong Texan, Darryl began his career in the financial sector just one day removed from earning his bachelor’s degree in corporate financial management and accounting at St. Mary’s University. Throughout his career, he has won awards for recruiting and development from Fortune 100 companies. In January 2007, he chose to begin and develop his independent practice. He joined Andres Gutierrez and Joseph Schuetze to form the PAX Financial Group. Darryl also served as the Chairman for Brooks Development Authority. Shortly after his service, Mayor Julian Castro, named a park “The Darryl W Lyons Park” in honor of his service. He was named to the 2010 San Antonio Business Journal’s “40 Under 40 Rising Stars,” which honors people making a difference in business and in the community.

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