“Life is Difficult”
Dr. Scott Peck in The Road Less Traveled
Change is hard. As an asset protection attorney, I see firsthand how difficult change can be, especially when it’s related to finances and investment decisions. Often, I see clients who hold bad investments in the real estate and stock markets with the hope of “getting out” as soon as they’re even. It’s almost always the case that one of two things occurs:
- The investment doesn’t get back to even and the client is financially forced to exit at the worst possible moment, or
- The investment gets back to even, and the client’s psychology changes dramatically. Suddenly, it seems as though continue to hold the investment is somehow much less risky than it really is.
Psychological Choices: Examining Ups And Downs
Fundamental problems exist with both of the choices listed above. In the first scenario, one sacrifices time and the value of money over time (the “time value of money”), not to mention the capital loss when the investment is finally cashed in. In short, the opportunity cost is too high for the payoff.
The fallacy of the second scenario is that once you’re even, the investment could continue on its upward path and actually end up being a profitable investment. Realize (i) the investment has already made what is likely a significant move, and (ii) your psychological stance is changing from one of “I just want to be even” to a position that looks like greed.
The decision imbalance (the inability to make the right choice) is a result of the fact that psychologically losing feels worse than winning feels good. Think about it: If one was actually suffering the “pain” of a losing position when the investment came back to even, one would liquidate the investment immediately. No questions asked. There is a whole field of psychology called loss aversion that is dedicated to studying this phenomenon.
Almost all of us consciously seek to avoid pain (“if only I could get back to even”), but that only lasts until the pain is gone. At the point when pain or losses disappear, we start looking for a new emotion. We start looking for the positive emotions associated with winning and profit. The problem is that one has to win and profit a lot in order to induce an emotional response on par with just a little bit of losing, so much so that it will be almost impossible to “win enough,” and you risk losing again before achieving your profit target.
Admitting When You’re Wrong
Sometimes, you just have to admit that you’ve been wrong, cut your losses, and move on to another investment. Some of the best minds on Wall Street have conditioned themselves not to be “married” to their investments. That’s because in the vast majority of cases, individuals don’t have control over their investments. If you’re holding a passive investment, something like real estate (in some cases where property is over leveraged) or stock on the publicly traded markets, you have to realize that you’re not in the driver’s seat, and hope is not a viable investment strategy.
Get comfortable with taking losses and moving on, and also get comfortable taking profits more quickly than usual. Again, understand that in the passive investment world of stocks and bonds, we have little control. We are psychologically programmed to do the “wrong things” when it comes to investment decisions, and ou have to win the battle with yourself before you can win with your investments.
If you’d like to talk about how strategic applies to wealth preservation and asset protection, please contact us today and visit us at http://www.mwpatton.com