WHAT SEEMS TRUE about money often turns out to be false. That brings me to the financial paradoxes I’ve come across during my investing journey. Here are my top 12:
- The more we try to trade our way to profits, the less likely we are to profit.
- The more boring an investment—think index funds—the more exciting the long-run performance will probably be.
- The more exciting an investment—name your latest Wall Street concoction, SPAC or anything crypto—the less exciting the long-term results typically are.
- The only certainty is uncertainty and the only constant is change. Today’s market decline will eventually become a bull market, and today’s market leaders, such as oil companies, will eventually yield once again to tech stocks.
- Big market trends play a huge role in our investment results, and yet trying to time macroeconomic cycles or guess which market sectors will outperform is a fool’s errand. Many big market rotations are set in motion by something wholly unanticipated, like a virus or a war.
- To be happy when wealthy, we also need to be happy with far less money. The fact is, above a relatively modest income level, no amount of extra money will change our level of happiness. More money might even make us miserable, as many lottery winners have discovered.
- The more we hate an investing trait—or any trait for that matter—the more likely it is that we’re resisting seeing that trait in ourselves. It’s what Carl Jung called the shadow—undesirable aspects of our personality that we hide from ourselves. Do you get irritated listening to people give unsolicited financial advice? There’s a good chance that you often give unsolicited financial advice but don’t like to admit it. For the record, I hate unsolicited financial advice and am never guilty of providing it.
- The more we learn about investing, the more we realize we don’t know anything. We should just buy index funds and instead spend our time worrying about stuff we can actually control.
- The more an investor is convinced he’s right, the more likely he is to be wrong. Short sellers, in particular, are likely to succumb to this mental trap. See Bill Ackman on Herbalife, or David Einhorn and Jim Chanos on Tesla.
- The more options we have, the less satisfied we’ll be with each one. This is the paradox of choice. Anyone who has spent hours “optimizing” his or her portfolio knows this all too well. Its close cousin is information overload, another frustration when investing.
- The more afraid we are of losing money, the more likely we are to take unwitting risks that lose us money. Sitting in cash seems wise during market selloffs. But the truth is, none of us can reliably time the market. Pull up any chart of the stock market over any period longer than a decade and you’ll see that the riskiest decision is sitting in cash, which gets destroyed by inflation.
- The more we think about our investments and look at our financial accounts, the more likely we are to damage our results by buying high because of greed and selling low because of fear. It can pay to look away.
I’ve come to appreciate these paradoxes not because I am wise. I’m not. Rather, I have come to appreciate them because I’ve made every single one of these mistakes—some of them on multiple occasions.
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John on Twitter @HighGroundPlan and check out his earlier articles.
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