We all make mistakes with money. Usually, it’s overspending on an item—only to find it on sale somewhere else, grrrr. Or spending on the wrong thing—when that NordicTrack becomes an expensive laundry rack. Or, maybe it’s drunk shopping, an increasingly common experience: shopping under the influence.
For investors, stocks can feel like another shopping category, as subject to impulse buying as any other. The costs are high – being too quick on the trigger to buy or sell an equity can lead to excessive trading costs, higher tax bills, and capital losses in an attempt to time the market.
Stephanie Bank is a behavioural economist who recently wrote in the Globe & Mail about the effects of ego depletion. “This is the idea that our self-control or willpower is drawn from a limited pool of mental resources. When we expend any kind of mental energy, we draw from that pool, reducing our capacity for self-control.” According to Ms. Bank, once our ability to self-regulate becomes overexerted, we’re in a depleted state and “lacking the willpower to resist temptation or make rational decisions.”
Ideally, a depleted person would remove herself from a potentially impulsive situation, and take a nap, meditate or retreat to watching funny cat videos on Facebook. Yet in a weakened state, it’s easier to reach for a caloric treat, send the ill-advised text, or jump into a costly trade.
When your weakness is food, there’s a $200 billion global weight control industry offering solutions— from protein shakes to appetite suppressing lollipops. But where’s the lollipop that will help an investor avoid making a bad trade? Here are some tips:
- Get better acquainted with your future self.
As Ms. Bank advises, “Research has shown that the strongest predictor of smart financial decision-making isn’t financial literacy, but rather how we think about the future.” Holding your investments through periods of short-term volatility is easier when you believe in your goals and your investment’s long-term upside.
- Plan your trade, trade your plan.
Many investors remind themselves of this old adage on a daily basis. Prepare a trading plan when you’ve got your wits about you and while the market is closed. When temptation strikes, you’ve got your plan to help you stay focused.
- Don’t get left holding the bag.
When trying to time a short-term trade it’s all too easy to get stuck holding when everyone else has safely fled.There’s an enormous universe of stocks out there and you can only have a few. As Warren Buffet suggests, concern yourself with the ones you’d be happy holding if the market shut down for the next 10 years.
- If you want to swing, know your thing.
Swing trading can be lucrative if you are deeply familiar with how your favourite stocks move. If this is your thing, know how your stock typically trades before and after earnings announcement, or what its seasonal or cyclical trading patterns.
- Get professional help.
Investment advisors come in multiple flavours, such as discretionary, (they make the trading decisions on your behalf based on your stated objectives), or non-discretionary (they confer with you before making trades on your behalf). Either way, for many investors, having an advisor manage their portfolio is the smartest, and possibly sweetest, choice of all.