seeds through winter. These tribal savings were loaded with community
and individual feelings. Today, few realize the embedded emotion in passbook
savings accounts until banks begin to fail or inflation destroys the
purchasing power of precious dollars.
Investing produces a wide range of emotion. The highs can be as disorienting
as the lows. The most common emotional traps are described
here. For each, consider if you would be comfortable owning investments
that produce these feelings.
Complete powerlessness
A feeling of complete powerlessness is unusual. We all like to feel that
life is moving along in a positive, predictable fashion. For most, a sense of
control over his or her own destiny is important. Unfortunately, savings,
investing, and speculating are all affected by elements beyond our control.
At times, these elements produce extreme results. When the stock market
dropped 90 percent between 1929 and 1933, the sense of powerlessness
was so great that a whole generation vowed never to buy a single share
again. Those left out of the great tech bubble that ended in March 2000 felt
equally powerless as they saw friends or acquaintances become instant millionaires.
Unmanageability
You must also think about unmanageability. A sense of unmanageability
is common with investments. The causes of unmanageability are many but
usually center around investment professionals and investment institutions.
Insurance salespeople may manipulate investors into high-commission, highsurrender
fee, and inappropriate variable annuities. The chosen mutual fund
might have huge loads and high minimums. The online brokerage Web site
may freeze during the market crash.
Helplessness
It is important to distinguish among a sense of powerlessness, a feeling
of unmanageability, and a sense of helplessness. Investors are never helpless.
They can always sell the investment or abandon it to bankruptcy and
move on. However, many investors feel helpless.
In bubbles and crashes, investors believe they have no choices; they
feel helpless but they are not. While you are powerless over the direction of
the market and you cannot manage your mutual fund manager, you can sell
the mutual fund and invest in real estate.
Grandiosity
The opposite extreme from helplessness is grandiosity. Investing commonly
triggers grandiosity: a false sense of expertise, manageability, and
control. Grandiosity tells you that the investment will work out because you
invested in it. In the tech bubble, many instant investment geniuses were
created. The lone speculator on a winning streak commonly experiences
grandiosity.
Overconfidence
A lesser form of ego inflation is overconfidence. Overconfidence is
your mind telling you that you know what you are doing and that things will
work out even though you have little experience and have done little research
or investigation. Overconfidence can lead you to trust your own decisions,
as well as your advisors, based on flimsy or nonexistent evidence. Overconfident
investors fail to scrutinize investment advisors, money managers,
mutual fund managers, realtors, journalists, and other supposed experts.
Inferiority
Investors are intimidated by many investments. Hedge funds are thought
to employ exotic strategies that the investor could never understand. Real
estate is said to be too difficult for average investors. A feeling of inferiority
has channeled many investors away from safe, appropriate investments
and into what are marketed as “simple, sure things.” The avoidance of real
estate in the 1990s due to intimidation by stockbrokers, who labeled it complex,
accompanied by the propaganda that stocks required no work and are
the best investment for the long run led to much grief in 2000 and 2001.
Confusion
Confusion is built into many aspects of the investment scene. Investors
experiencing confusion often shut down or make quick, poor choices.
Stocks are the most confused asset class. Thousands of mutual funds
and stocks cause mass confusion. Few people know how to compare all the
funds and how to distinguish among all the companies, much less how to fit
different funds or stocks with different investment goals and different investors.
Many investors buy nothing or buy whatever is most hyped. They
are baffled by brokerage statements and tax implications. Few know if they
are making money or losing money, much less how they compare to market
averages.
Read More : Investment And Emotions Traps
