Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog and on his personal Web site, BehaviorGap.com.
By now you have probably heard about the growing evidence that "dumb money" is entering the market. The dumb money is not my term, by the way; it’s how Wall Street refers to individual investors who repeatedly sell stocks at a low price, only to turn around later and buy them for high prices.
If the mistake is frequent that it actually has a name, why do we keep doing it, and what can we do stop?
When we make financial decisions we're faced with a choice: Do we act based on what we know or how we feel?
In an intellectual exercise, knowledge wins. But in the real world, we’re hardwired to pursue the things that give us pleasure or provide security and run as fast as possible from the things that cause us pain. This genetic trait means that we’re often driven by how we feel instead of what we know.
Here is an example. In December 2008, The Economist published one of its classic covers. I remember seeing this cover, and a year or so later being struck by how well the image captured how I had felt. In fact, when I saw it again in 2010 I had an emotional response that surprised me as I thought back to those feelings. The picture made me feel like everyone else did during that time. I was depressed, sad, hopeless and felt like I was a fool for not gathering what little gold I had left before it too fell into the dark, bottomless hole pictured on the cover.
But how I felt at the time was exactly the opposite of how I knew (in an intellectual sense, at least) I should act. Every investment decision should at least be informed by what we know, instead of driven solely by what we feel.
So if you’re thinking about making a sudden change to your portfolio here are a few things to consider:
1) Stop long enough to ask yourself if your decision is based on how you feel or what you know. Is what you are about to do based on what is going on in the market or is it based on an investment plan you put in place when you were thinking clearly?
2) Don’t just do something, stand there. When dealing with investments there is often this feeling that we should be doing something. A lack of action implies we're missing an opportunity or making a mistake. Growing a garden takes lots of hard work, but at some point you have to let the plants grow. If you have a plan, let it work.
3) If you're still convinced that you need to act, take a mandatory timeout. Write yourself a letter that explains what you intend to do and why. Pretend like you are trying to convince a wise friend that your proposed course of action makes sense. It might help to actually meet with someone you trust and talk it through. Putting it on paper can help you weigh knowledge versus emotion.
4) Please, ignore gut feelings when it comes to investing. I can't tell you how many times I have heard people use that as an excuse to do something dumb.
I know, I know. Believing that we can remove all emotion from our decision making just isn't realistic. But we can still take plenty of steps to make knowledge the foundation of our financial choices.
E-mail This Print Share Close Linkedin Digg Facebook Mixx My Space Permalink 401(k)'s, Exchange Traded Funds (E.T.F.'s), Mutual Funds, Stocks & Bonds Related Posts From Bucks The Case for Slow MoneyAre We Buying High All Over Again?Too Many Investors Are Actually CollectorsMaybe You Shouldn’t Invest Like HarvardMarket Forecasts Are Just Guesses Previous Post Monday Reading: How to Avoid Airplane Germs Next Post Tuesday Reading: An Odd New Diet Fad NYTD.CRNR.userContent.getUserContent(25,'default'); Search This Blog Search Previous Post Monday Reading: How to Avoid Airplane Germs Next Post Tuesday Reading: An Odd New Diet Fad Follow This Blog RSS Kids and Money Money Questions From KidsChildren often ask tough questions about money. In a series of posts this month the Bucks blog will discuss them one by one. We invite you to answer a few yourself or suggest new ones that your children have asked.
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Featured Posts How to Deal With Tainted Drywall // Tag List CREDIT CARDS 76 BUDGETING 64 TAXES 63 CHECKING ACCOUNTS 57 RETIREMENT 50 MORTGAGES 46 BUYING A HOME 42 INVESTMENTS 41 DEBIT CARDS 40 SAVINGS ACCOUNTS 38 STUDENT LOANS 37 STOCKS & BONDS 33 HEALTH INSURANCE 32 401(K)'S 28 DISCOUNTS 28 MUTUAL FUNDS 26 EXCHANGE TRADED FUNDS (E.T.F.'S) 26 PAYING FOR COLLEGE 26 PHILANTHROPY 20 IDENTITY THEFT 19 HEALTH EXPENSES 19 HOME INSURANCE 18 ASSET ALLOCATION 17 RELATIONSHIPS 17 NEW YEAR'S RESOLUTIONS 15 BUYING A CAR 15 DIVORCE AND MONEY 15 BROKERAGE FIRMS 13 I.R.A.'S 13 ESTATE PLANNING 13 Who's Who at BucksJennifer Saranow Schultz is a freelance journalist based in San Francisco.
Posts | E-mail | BioTara Siegel Bernard is a personal finance reporter for The Times.
Posts | E-mail | BioRon Lieber writes the Your Money column, which appears in The Times on Saturdays.
Posts | E-mail | BioTanzina Vega is a Web producer at The Times.
Posts | E-mail | Bio .partnerHeadlines .story { padding: 0; } .partnerHeadlines .story .date { font-size: 1em; /* 10px */ color: #808080; margin: 0; } Archive Select Month March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 Follow The New York Times »FacebookTwitterYouTubeRSS Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Back to Top © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Corrections RSS First Look Help Contact Us Work for Us Advertise Site Map if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-98"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Some tips for insuring fine art from the Insurance Information Institute.
March 08
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March 04 //
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Featured Posts How to Deal With Tainted Drywall // Tag List CREDIT CARDS 76 BUDGETING 64 TAXES 63 CHECKING ACCOUNTS 57 RETIREMENT 50 MORTGAGES 46 BUYING A HOME 42 INVESTMENTS 41 DEBIT CARDS 40 SAVINGS ACCOUNTS 38 STUDENT LOANS 37 STOCKS & BONDS 33 HEALTH INSURANCE 32 401(K)'S 28 DISCOUNTS 28 MUTUAL FUNDS 26 EXCHANGE TRADED FUNDS (E.T.F.'S) 26 PAYING FOR COLLEGE 26 PHILANTHROPY 20 IDENTITY THEFT 19 HEALTH EXPENSES 19 HOME INSURANCE 18 ASSET ALLOCATION 17 RELATIONSHIPS 17 NEW YEAR'S RESOLUTIONS 15 BUYING A CAR 15 DIVORCE AND MONEY 15 BROKERAGE FIRMS 13 I.R.A.'S 13 ESTATE PLANNING 13 Who's Who at BucksJennifer Saranow Schultz is a freelance journalist based in San Francisco.
Posts | E-mail | BioTara Siegel Bernard is a personal finance reporter for The Times.
Posts | E-mail | BioRon Lieber writes the Your Money column, which appears in The Times on Saturdays.
Posts | E-mail | BioTanzina Vega is a Web producer at The Times.
Posts | E-mail | Bio .partnerHeadlines .story { padding: 0; } .partnerHeadlines .story .date { font-size: 1em; /* 10px */ color: #808080; margin: 0; } Archive Select Month March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 Follow The New York Times »FacebookTwitterYouTubeRSS Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Back to Top © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Corrections RSS First Look Help Contact Us Work for Us Advertise Site Map if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-98"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Injecting yourself with pregnancy hormones to lose weight, a better joint bank account for your aging parents and other consumer news from The Times.
March 07
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March 07 //
Monday Reading: How to Avoid Airplane GermsStaying health while up in the air, ever-rising health insurance premiums, a pair of articles on municipal bonds and other consumer news from The Times.
March 04 //
Money Lessons From AthletesPaul Sullivan, in his Wealth Matters column, looks at how professional football players manage their finances.
Featured Posts How to Deal With Tainted Drywall // Tag List CREDIT CARDS 76 BUDGETING 64 TAXES 63 CHECKING ACCOUNTS 57 RETIREMENT 50 MORTGAGES 46 BUYING A HOME 42 INVESTMENTS 41 DEBIT CARDS 40 SAVINGS ACCOUNTS 38 STUDENT LOANS 37 STOCKS & BONDS 33 HEALTH INSURANCE 32 401(K)'S 28 DISCOUNTS 28 MUTUAL FUNDS 26 EXCHANGE TRADED FUNDS (E.T.F.'S) 26 PAYING FOR COLLEGE 26 PHILANTHROPY 20 IDENTITY THEFT 19 HEALTH EXPENSES 19 HOME INSURANCE 18 ASSET ALLOCATION 17 RELATIONSHIPS 17 NEW YEAR'S RESOLUTIONS 15 BUYING A CAR 15 DIVORCE AND MONEY 15 BROKERAGE FIRMS 13 I.R.A.'S 13 ESTATE PLANNING 13 Who's Who at BucksJennifer Saranow Schultz is a freelance journalist based in San Francisco.
Posts | E-mail | BioTara Siegel Bernard is a personal finance reporter for The Times.
Posts | E-mail | BioRon Lieber writes the Your Money column, which appears in The Times on Saturdays.
Posts | E-mail | BioTanzina Vega is a Web producer at The Times.
Posts | E-mail | Bio .partnerHeadlines .story { padding: 0; } .partnerHeadlines .story .date { font-size: 1em; /* 10px */ color: #808080; margin: 0; } Archive Select Month March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 Follow The New York Times »FacebookTwitterYouTubeRSS Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Back to Top © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Corrections RSS First Look Help Contact Us Work for Us Advertise Site Map if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-98"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Investors are full of confidence and flocking back to stocks all of the sudden. Is Wall Street right to call them the dumb money?
March 07
Monday Reading: How to Avoid Airplane GermsStaying health while up in the air, ever-rising health insurance premiums, a pair of articles on municipal bonds and other consumer news from The Times.
March 04 //
Money Lessons From AthletesPaul Sullivan, in his Wealth Matters column, looks at how professional football players manage their finances.
Featured Posts How to Deal With Tainted Drywall // Tag List CREDIT CARDS 76 BUDGETING 64 TAXES 63 CHECKING ACCOUNTS 57 RETIREMENT 50 MORTGAGES 46 BUYING A HOME 42 INVESTMENTS 41 DEBIT CARDS 40 SAVINGS ACCOUNTS 38 STUDENT LOANS 37 STOCKS & BONDS 33 HEALTH INSURANCE 32 401(K)'S 28 DISCOUNTS 28 MUTUAL FUNDS 26 EXCHANGE TRADED FUNDS (E.T.F.'S) 26 PAYING FOR COLLEGE 26 PHILANTHROPY 20 IDENTITY THEFT 19 HEALTH EXPENSES 19 HOME INSURANCE 18 ASSET ALLOCATION 17 RELATIONSHIPS 17 NEW YEAR'S RESOLUTIONS 15 BUYING A CAR 15 DIVORCE AND MONEY 15 BROKERAGE FIRMS 13 I.R.A.'S 13 ESTATE PLANNING 13 Who's Who at BucksJennifer Saranow Schultz is a freelance journalist based in San Francisco.
Posts | E-mail | BioTara Siegel Bernard is a personal finance reporter for The Times.
Posts | E-mail | BioRon Lieber writes the Your Money column, which appears in The Times on Saturdays.
Posts | E-mail | BioTanzina Vega is a Web producer at The Times.
Posts | E-mail | Bio .partnerHeadlines .story { padding: 0; } .partnerHeadlines .story .date { font-size: 1em; /* 10px */ color: #808080; margin: 0; } Archive Select Month March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 Follow The New York Times »FacebookTwitterYouTubeRSS Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Back to Top © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Corrections RSS First Look Help Contact Us Work for Us Advertise Site Map if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-98"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Staying health while up in the air, ever-rising health insurance premiums, a pair of articles on municipal bonds and other consumer news from The Times.
March 04
Money Lessons From AthletesPaul Sullivan, in his Wealth Matters column, looks at how professional football players manage their finances.
Featured Posts How to Deal With Tainted Drywall // Tag List CREDIT CARDS 76 BUDGETING 64 TAXES 63 CHECKING ACCOUNTS 57 RETIREMENT 50 MORTGAGES 46 BUYING A HOME 42 INVESTMENTS 41 DEBIT CARDS 40 SAVINGS ACCOUNTS 38 STUDENT LOANS 37 STOCKS & BONDS 33 HEALTH INSURANCE 32 401(K)'S 28 DISCOUNTS 28 MUTUAL FUNDS 26 EXCHANGE TRADED FUNDS (E.T.F.'S) 26 PAYING FOR COLLEGE 26 PHILANTHROPY 20 IDENTITY THEFT 19 HEALTH EXPENSES 19 HOME INSURANCE 18 ASSET ALLOCATION 17 RELATIONSHIPS 17 NEW YEAR'S RESOLUTIONS 15 BUYING A CAR 15 DIVORCE AND MONEY 15 BROKERAGE FIRMS 13 I.R.A.'S 13 ESTATE PLANNING 13 Who's Who at BucksJennifer Saranow Schultz is a freelance journalist based in San Francisco.
Posts | E-mail | BioTara Siegel Bernard is a personal finance reporter for The Times.
Posts | E-mail | BioRon Lieber writes the Your Money column, which appears in The Times on Saturdays.
Posts | E-mail | BioTanzina Vega is a Web producer at The Times.
Posts | E-mail | Bio .partnerHeadlines .story { padding: 0; } .partnerHeadlines .story .date { font-size: 1em; /* 10px */ color: #808080; margin: 0; } Archive Select Month March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 Follow The New York Times »FacebookTwitterYouTubeRSS Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Back to Top © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Corrections RSS First Look Help Contact Us Work for Us Advertise Site Map if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-98"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Paul Sullivan, in his Wealth Matters column, looks at how professional football players manage their finances.
Jennifer Saranow Schultz is a freelance journalist based in San Francisco.
Tara Siegel Bernard is a personal finance reporter for The Times.
Ron Lieber writes the Your Money column, which appears in The Times on Saturdays.
Tanzina Vega is a Web producer at The Times.
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