The Two 'Devils' That Could Ruin Your Portfolio (And How to Beat Them)
byJun 20th 2012 10:35AM
Right now, there's probably one of two very different devils sitting on your shoulder, whispering in your ear. And it's dictating your every financial move -- either paralyzing you or compelling you to overreact.
And if you're not careful, that nefarious little voice could send your portfolio into the ground.
The devils are greed and fear. And while you certainly understand those emotions in the abstract, you may not recognize how they're specifically affecting your investing behavior.
Greed is that overpowering desire you have to grow your portfolio too quickly. It compels you to take risks that may -- or may not -- pay off.
Fear is that anxiousness you feel when confronting the possibility you might lose money while investing. It convinces you to sacrifice long-term growth because of short-term market fluctuations.
Depending on how the market is faring, one of these devils will rear its head -- or maybe both. In fact, a recent study by Natixis Global Asset Management reported that 80% of financial advisers admit their clients are "torn between a desire to increase returns and the need to keep their investments safe."
The common results of these devils' urgings are similarly twofold: making risky investments in long shots, hoping they'll return 10 times or more in value; or sticking your money in a risk-free investment like Treasury bills -- which have yields so low that they don't keep pace with inflation.
They'll make you trade too often -- or not trade enough. Chase after yield. Or too heavily concentrate investments. Or make any number of notorious investing mistakes caused by emotions.
Don't Ignore Those Devils -- Fight Them
These devils of greed and fear are powerful triggers. But they shouldn't be ignored. Often they're telling you the opposite of what you should be doing.
As Warren Buffett famously quipped, investors should "be fearful when others are greedy and greedy when others are fearful."
Meaning if your instincts are to be greedy -- it's probably time to exercise caution. Or if your gut's making you nervous, it's probably an indicator you should be taking more risk.
You also need to be conscious of how these devils might be affecting your thinking when deciding on new investments.
Is that new biotech company you're considering investing in a smart buy, or are you greedily speculating?
Do you really think the world is about to come collapsing down and that gold is the only safe investment -- or are you fearfully buying into what the media (or those selling physical gold) would like you to believe?
In order to temper both sides and make them work in your favor, you need to have a long-term saving and investing strategy -- one with risks you understand and have the ability to stomach and a long-term historical growth rate you're comfortable with.
Make Friends With Greed and Fear
On a day-to-day basis, you have to find a balance between greed and fear. You need to be somewhat greedy, realizing your portfolio will need to grow over the long term. But you also need to be somewhat fearful, conscious of potential risks and diversifying your money between varieties of asset classes as a result.
That's how you can manipulate these devils into securing you a comfortable retirement.
This article was written by Motley Fool analyst Adam J. Wiederman. Click here to read Adam's free report on the best ways to ensure and plan for a wealthy retirement.