Sometime around 2000, I gambled some of my money away while fooling myself into thinking I was doing something very sophisticated. I wasn’t in Las Vegas: I was sitting at my computer buying shares of Krispy Kreme Donuts on eTrade. I had seen the front page of Forbes or Fortune or some other publication touting the company’s success and its future prospects, and decided on my own, without seeking the counsel of my wiser and more seasoned father, that this was destined to be a profitable investment. While the details are a bit hazy at this point–maybe to some extent to spare myself the pain of the memory–I bought in at some point near the high after the IPO, and eventually sold out somewhere near the low when the stock value had cratered nearly 80% of its value. And this decision–really a gamble–was based on little more than a cover page on a financial publication and an affinity for fresh, warm confectioner pastries. I put some chips on red and the ball came to rest on black.
A very small proportion, indeed less than 20% of us, receive education on investing from our parents. Even among that 20%, it’s unclear whether that investing training and knowledge that is passed down is actually correct or useful. From first hand experience, I can share that some who did receive some investing education at home choose to use trial and error learning instead. In the scenario above, I could have sought out the investing experience of my father, which may have spared me this gambling loss, but I was in graduate school (which means I still thought I knew it all) and I was pulling the levers all by myself.
Part of the last research study we conducted on affluent Americans included questions related to investing-related behaviors (see page 214 in The Next Millionaire Next Door). We wanted to learn how millionaire investors believed they had behaved in the past when it came to their investments, specifically looking at perceived investing mistakes. To do this, we listed behaviors that corresponded to specific types of cognitive biases in investing. As an example, we didn’t ask our sample if they suffered from gambler’s fallacy, instead we asked if they traded stocks based on the thinking “I’ve lost so many times that this has to be my time to win!” Instead of asking if they were subject to the anchoring phenomenon, we asked practical questions around things like holding on to loss shares for too long, or selling a good stock to soon. Here are the top “mistakes” in the activity of investing as reported by our millionaires:
- Selling a bad stock too late: 74%
- Selling a great stock too early: 60%
- Waiting too long to sell stocks at a market high: 58%
- Waiting too long to invest at a market low: 55%
- Trying to balance a “safe” portfolio with a “speculative” portfolio: 54%
– The Next Millionaire Next Door, page 214
If nearly three quarters of millionaires report making a market-timing mistake, what does that mean for the rest of us? First, let’s consider some additional data from our millionaire sample. Despite reporting such mistakes, millionaires continue to invest in the stock market and they are confident in their investing capabilities. This is most likely because they also spend significant time reading and researching in the field of investing. Note here that in our research, prodigious accumulators of wealth (PAWs) spend more time each month than those who are under accumulators of wealth (UAWs) on investing-related research (11.3 hours versus 8.7 hours, respectively). We know that as investing knowledge increases, so too does our psychological ability to take on risk in our portfolio (e.g., investing in equities).
If you don’t have time to commit to learning about and staying informed with respect to investing basics, the solution may be to turn to a professional to manage your portfolio for you. Only about one third of millionaires in our most recent sample reported relying heavily on a professional advisor, but the reality is that many of us don’t have the time (or the interest level) to commit to learning the basics of sound investing philosophy and practice. Another problem is that a significant segment of the population continues to believe that they don’t have enough investable capital to warrant finding someone to help get them started. But the industry is changing and adapting to meet this need:
Today, there is an entire sub-industry that adheres to a fiduciary standard of counsel in the world of financial services that is more accessible at a broader range of income and wealth levels than before. These are the individuals who will act in your best interest.
– The Next Millionaire Next Door, page 219
Most millionaires persist in their investment in the stock market regardless of poor decisions they’ve made in the past. Building your own personal knowledge, monitoring the details of your financial life, and (potentially) learning from professionals that are committed to acting in your best interest can lead to better investing decisions in the future.