By Russell Holcombe, MTx, CFP®
One of the hallmarks of any successful financial outcome is a strong and realistic investment plan. Your investment philosophy is necessary for your financial independence, so it’s critically important that you adopt a strategy that fits both your financial and emotional goals. Knowing what you like and what you should avoid are key to your financial strength. In my book You Should Only Have to Get Rich Once, we call this financial muscle. To build strong financial muscle, there are some common mistakes investors make when they have weak financial muscle. Many of these are hardwired into our human DNA so knowledge is your only defense. You will always crave ice cream; it is delicious, but knowing that it can be addictive is the key to avoiding overindulgence in the decadent treat. Investing strategies can be addictive too, and it’s up to you to build strong financial muscle to resist temptation. Here are some examples of common investment missteps:
Addicted to Profits
The most addictive part of investing is also the most appealing: the profits. I wrote about this in my book, You Only Have to Get Rich Once, back in 2011, and it remains true to this day. Potential profit is the purest aphrodisiac. The better something feels, the more risk one will take to get it. Profits are like drugs in this way; they trigger a dopamine response and can quickly drive people to make poor investment decisions in pursuit of “winning big” and finding financial freedom.
This is well documented, and research shows that trading in the financial markets, specifically day trading, can stimulate the same centers in the brain that are associated with addiction. (1) The meme-stock debacle of early 2021 (jumping in on stocks like GameStop that skyrocketed in value due to investors hoping to win big) was a clear example of the addictive nature of get-rich-quick investment strategies. (2)
Real wealth is rarely the by-product of an investment strategy based on short-term profit motives. It is the result of spending less than you make, protecting what you have earned, and investing wisely. This creates long-lasting financial strength. Yes, this may seem boring, but it works. The market is inherently risky, so it must be approached with optimistic caution as opposed to wild abandon.
“Don’t just do something, stand there!” The anxiety of investing a lump sum of cash seems counterintuitive, but I have witnessed the hollowed eyes of those facing the decision firsthand. The fear of making the wrong decision and losing money is terrifying. Justifiably so. A bad financial decision can undo in minutes what it took decades to earn.
But trying to search the internet for investment advice feels like searching WebMD for medical advice. Every symptom could potentially be a horrific, debilitating disease. The internet has democratized information and anyone can be a financial pundit. “Do this! Don’t do that!” It can freeze even the most sophisticated investor. It is really challenging to carve out what applies and does not apply to you, which is why the wealthiest investors always have advisors. Just as the best athletes always have coaches, we also need someone to help us see what we are unable to see ourselves.
You will eventually have to make a decision, but you don’t have to do it in a day. Take your time, find a coach, and create a financial plan based on your Family Overhead. Then you can move confidently when you are ready. Nothing is on fire.
Trying to Time Mr. Market
The most damaging of all the returns-killing biases is market timing. So much has been written on the subject that I won’t spend too much time (a quick Google search will unleash a mountain of evidence), except to point out one outcome of the damage this bias can cause. It has to do with the sequence of investment returns—the best days usually follow the worst days. Missing the worst day usually means you are going to miss the best day too. And the cost to your long-term investment performance can be staggering. You likely will never recover from a failure in trying to time the market.
It’s important to pick an investment strategy that fits both your financial and emotional goals and stick with it, making changes when your life dictates, and focusing on the long term.
Are You Addicted to Bad Investment Strategies?
Investing for financial freedom doesn’t have to come at the risk of losing everything. At Holcombe Financial, we design your investment plan with your unique needs in mind. Don’t trap yourself with bad investment strategies; schedule a no-obligation introductory meeting to learn more about how we can help. Reach out to us at (404) 257-3317 or email email@example.com to get started today.
Russell (Rusty) Holcombe is the CEO and strategist at Holcombe Financial, a financial advisory firm serving entrepreneurs and corporate executives and managers. With over 25 years of experience, Rusty spends his days leading Holcombe Financial (a firm his father founded) and providing financial services that help his clients grow and protect their wealth so they can experience financial independence. Rusty is the author of You Should Only Have to Get Rich Once, which has won multiple awards, and created Holcombe Financial’s proprietary financial planning software, which helps clients make smarter financial decisions.
Rusty earned a bachelor’s degree in business administration with a focus in finance and real estate from Southern Methodist University and a master’s degree in taxation from Georgia State University. He is also a CERTIFIED FINANCIAL PLANNER™ professional. In his free time, Rusty and his wife, Regina, tend to their personal farm and grow their own food. You can often find him pursuing his hobby of long-distance running. To learn more about Rusty, connect with him on LinkedIn.