WHILE HANGING OUT at the local Charles Schwab office, you meet a high-octane trader named Hal. He paces up and down like the Energizer bunny and talks so fast you can’t get a word in. Incessantly checking his phone, he abruptly gestures to the door and insists you join him for lunch. Apparently, Apple is up three points, his options are in-the-money and he wants to celebrate.
Hal speeds to a nearby Subway, where he proceeds to order the Spicy Italian for both of you. Just as you take a bite, he puts down his phone and cringes as his face turns red. He wails that the virus scourge has crimped iPhone sales in China. Apple is now down six and his near-term options will expire worthless.
What’s with this guy? This isn’t just a case of the Starbucks jitters. Hal’s behavior shows the telltale signs of a manicky temperament—unbounded energy, flamboyance and a big appetite for risk-taking.
Now, don’t get me wrong, all investing involves risk. Last year, even bond investors got acquainted with the old saw, “no pain, no gain.” But today, we aren’t just talking about your Uncle Louie, who drums his fingers on the table before the food arrives. Instead, we’re pondering folks with a high need for arousal and action that undermines their investment success.
That clearly includes day traders and options players. Their hyperactivity is all too obvious. But what about more subtle manifestations, to which most of us are susceptible? Sometimes, a manic temperament masquerades as legitimate portfolio changes, like portfolio rebalancing every quarter or even every month.
Or how about mutual fund switching? You thought funds were a lot safer than owning individual stocks. They usually are. But they’re also vulnerable to arousal abuse. Do you choose fund families with the most lenient exchange privileges? Do you really need to shift from one sector fund to another based on a slick podcast presentation? The temptation is made all the greater by no fund redemption fees. Is the goal here really portfolio improvement—or is it more truthfully a need for excitement on a grey and boring winter day?
Portfolio reallocation can be a special case of switching syndrome. Has international begun to move? Why not jump in? Maybe the tech debacle has run its course, so you bolt out of defensive stocks and back into growth shares. My own recent sin: I succumbed to the much-ballyhooed January effect, which promises a run for small-cap stocks from two weeks before through two weeks after New Year’s. Well, maybe next year.
Are you suffering from FOMO, or fear of missing out? Following the money can work for a month or two until investors’ collective common sense reasserts itself. Remember meme stocks like GameStop? Such herding behavior by FOMO crowds isn’t confined just to stock manipulators. Ominously, Hee Jin Kim and his associates found FOMO to be almost as common among active stock traders as among bitcoin speculators.
Given to hyperactivity? Start by acknowledging that you’re a high-arousal type who thrills to action and the taking of risk. You can’t start to get control over your weakness as an investor until you admit it. Take solace from knowing that manic-proneness has been related to creativity and high productivity.
A new year is a good time to resolve to learn and practice self-discipline. You might leave your portfolio alone and instead take refuge in activities that also promise an action hit, like a formidable hike, a challenging new exercise routine or competitive sports. Alternatively, you might trade investments on paper only, keeping a record of your performance relative to a benchmark. Doesn’t sound satisfying? For those who would otherwise suffer withdrawal pangs, several commentators have recommended a solution: Put 90% or 95% of your investment money into mutual funds and exchange-traded funds, and then use the remainder to trade individual stocks.
Meanwhile, seek support from others for your newfound commitment to self-control. Take counsel and encouragement from family and friends. Find a buddy who, say, enjoys streaming action movies with you. Maybe you’re fortunate to have a partner who’ll review your monthly brokerage statements with you and offer kudos when you show greater restraint. What if you feel your trading life has spun out of control and losses are mounting? You might consult a therapist or join a support group for overactive traders, such as Gamblers Anonymous.
One final suggestion: Try reading buy-and-hold classics like Jeremy Siegel’s Stocks for the Long Run and John Bogle’s Little Book of Common Sense Investing. To be sure, we can change personality only so much. Still, returns are maximized by keeping our lust for action in check. Take a page from Warren Buffett’s playbook and accept that, when it comes to investing, boring is beautiful.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.