"CRASHES, TERRORISTS AND SHARKS (OH MY)"
After studying the investing thing for awhile, I've come to the conclusion that your best chance of long-term success is to
1) Set up a simple, executable plan (invest in three to four broad-based index funds);
2) Start doing the plan;
3) Don't f*ck up* the Plan.
4) AND DON'T GET CAUGHT UP IN FEAR
* Like freaking out at the wrong time and bailing; like changing your mind all of a sudden to chase "hot" returns; like flipping in and out of investments looking for something better; etc.
Barry Ritholtz has some useful thoughts on why we're afraid of the wrong things and how we undermine ourselves: ...
1) Understanding What We Fear -- and Why.
2) Misunderstanding "Risk" -- hurts performance.
3) Recognizing these errors and avoiding them. ...
* * * * *
NEURO FINANCE -- How Your Brain Interferes with Your Investing
1. Risk Aversion; Herding, Groupthink
2. Optimism Bias
3. Confirmation Bias
4. Expert Opinions
5. Recency Effect
6. Endowment Effect
7. Hindsight Bias
* * * *
AND YOUR FEARS CAUSING SUB-OPTIMUM PERFORMANCE IN THE DAY-TO-DAY LIVING DEPARTMENT:
FEAR OF ... SHARKS?
5-10 People a year are killed by sharks worldwide annually.
Deaths From Other large predators:
Lions - 100
Elephants - 100
Hippos - 500
Crocodiles - 1,000
Snakes - 50,000.
Dogs - 25,000 (almost all due to rabies). ...
* * * * * *
FEAR OF ... TERRORISM?
2010: U.S. noncombatant fatalities from terrorism worldwide = 25
2011: Terror deaths = 8
People who die after being struck by lightning = 29. ...
* * * * *
1) Mis-Managing Losses
2. Excess Trading
3. Lack of Discipline
4. Costs, fees
5. Position Sizing
6. High Turnover = High Taxes
7. Taking profits too soon
9. Deviating from Strategy (“style drift”)
10. Emotional Decision making
11. Over Confidence
12. Poor Risk to Reward Ratio ...
My take away from the above is, concentrate and manage the important stuff that you can control ... or at least impact.
(Worrying about dying on the next Southwest Airlines flight to Vegas is non-productive, so don't do it -- or do it as little as possible.)
Think long-term about investments.
Ignore the day-to-day, week-to-week, year-to-year.
You cannot successfully time the market, cannot successfully out-think the market, so it's not a good strategy to try.
Time is your ally. And when you have saved/earned ENOUGH, stop playing the game and shift more of your stash to less risky investments.