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I’ve been in a bit of a financial funk these last three months, and I’ve finally managed to overcome my heart and listen to my head. I’m really surprised how difficult I’ve found it, especially with my business and financial background. I mean, truly difficult.
It all started when I was setting up a 10-year fixed-term annuity before retirement. I had initially decided on a purchase amount and, to fund it, liquidated some of my developed world index tracker. I moved the cash into my Vanguard money market fund to keep the money safe prior to the annuity purchase.
After more research and some analysis, I decided to purchase a smaller annuity, leaving me with approximately $120,000 still sitting in my money market fund. Because of market behaviour this last while, I kept putting off reinvesting the money back into the original fund it came from.
I’ve looked at it nearly every other day for the last three months, and I couldn’t pluck up the nerve to simply reinvest. It’s absolutely ridiculous, and the annoying thing is I knew I was being pretty dumb and needed to get a grip, but man, was it hard!
I got a severe case of status quo bias with a large helping of loss aversion, all wrapped in a blanket of analysis paralysis, and I’m here to tell you it’s as real as a brick wall and nearly as hard to knock down. I was literally mentally stuck and couldn’t execute a simple financial transaction for three months—unbelievable.
I think this experience has really hit home that financial decision-making isn’t purely rational, even with my strong business and financial background. Emotions, biases, and an irrational fear of making a “wrong” move overrode my logical understanding. I guess this is why personal finance is often called personal as much as finance.
I’m really annoyed with myself, but at least I’ve eventually taken the plunge back into the market. The next time I hear someone talking about behavioural finance, I’m actually going to hear them and internalise it as best I can.
I guess you have two options: chuckle at my self-inflicted misfortune, or perhaps take it on board and reflect on how a reasonably financially self-assured and experienced investor got blindsided by the psychology of money. I suggest the latter.
For my own sadness and everyone else’s benefit, I just asked Google Gemini to tell me the opportunity cost over the last 90 days. $11,500– that’s how much my indecision has cost. I’m now going to sit down in a dark room for a few hours. Have a good day.
Yes, but what is $11,500 in your world? My guess is not much.
What if, instead of the market rising, it had fallen over the last 3 months? My guess is that you’d currently be thinking, not how “dumb” you are, but how much of a genius you are.
The markets going to do what it’s going to do. As best as we can, we have to stick to our plan. I understand you’re saying that was difficult, but give yourself some grace. I don’t think it would even bother you except for how well you’ve already done.
I was really trying to illustrate the opportunity cost of my delay. As I have no plan to crystallize, it’s more in theory rather than reality. What’s it worth in my world? Let’s put it this way. I can’t even imagine Jeff Bezos not picking up an $11,500 bundle of money if he happened upon it on the sidewalk. 😂
Such paralysis is indeed real. When I’m unsure in uncertain markets I’ll make a series of small equity purchases. Getting into action, no matter how small, seems to aid me in taking larger steps. Furthermore, this post also touches upon FOMO. If one delays and this seems wrong, then regret sets in. If the opposite occurs, then one may feel vindicated. In fact, neither are helpful. Morgan Housel has written extensively including one book entitled “The psychology of money.”
Of course all markets are “uncertain” so it is best to accept that and move on, which can be easier said than done. I am always missing the peaks, etc. and so I don’t even try. For example, in 2008-9 I purchased on the way down and on the way up. Now, 17 years later any emotion about this has faded and my specific timing doesn’t matter. My records indicate I did well as did most long term investors. So it is today, and so it will be tomorrow. Beware that internal conversation “this time it is different.”
Mark, thanks for an interesting post. I’ve come to accept that I’m as susceptible as anyone else to all the cognitive biases associated with finance. It seems to be one of the many wonderful features evolution has provided to us.
We are traveling to a funeral in a few days. It’s for Carol, my sister-in-law’s Mom. My sister-in-law’s father, Bill, was a master craftsman. He taught industrial arts and did beautiful woodworking. Many years ago I built a custom box for our camping gear. We were on a family camping trip in the Shenendoahs and Bill and Carol joined us. Bill inspected the box and congratulated me on a job well-done. Instead of accepting his kind words gracefully, I pointed out all the flaws. He then told me something I remember to this day. He said “Rick, the only people who don’t make mistakes are liars, and people who never try anything. If you try things, you will make mistakes. Lean from them and move on”. I think of that often, not just the wisdom, but the kindness with which it was given.
Rick, he not only shared wisdom with you, but also a very pragmatic and empowering philosophy, all condensed into a few powerful words. Language is a wonderful tool when wielded this way.
You didn’t actually make a loss – it’s only ever paper profit until you cash out anyway.
The other important psychology of money is accepting you will do sub-optimal things all the time. Sometimes inertia/procrastination will be your friend e.g. when the market tanks other times it will appear you’ve had an opportunity cost. But if get at peace with a mantra like “It’s time in the market that matters, not timing the market” then it becomes easier to ride the little ups and downs.
Time in the market…. that’s the very phrase that eventually snapped me back to reality and overcame my paralysis. To clarify, while I was already aware of this saying, reading it again in an article the other day was my catalyst.
BB, thanks for putting this in perspective. None of us are perfect, and your words offer some comfort. My decisions, both financial and life, though sub-optimal, have been good enough. As Chrissy reminds me each day, we have a good life.
Thanks Mark for your honest post. I feel fortunate that I have really internalised the messages that (1) no one can successfully and repeatedly time the market; and (2) it is really difficult to pick individual stocks and best the market. So we just get money into low cost index funds ASAP, then forget about it. This will change a little as we near retirement, but the basic principles will remain.
Appreciated your candid sharing. Similar situation here – while I missed the boat when the market floated higher, I also missed the 23.6% peak-to-trough drop in the MSCI World Index and FTSE Developed Index. It feels like a roller coaster ride in this market.
Here’s what I did, in case it helps you or others: I had recently been waffling about making a slight tweak to my investments. As soon as I edited my written investment policy statement, I was able to overcome the inertia and enact the change. Something about seeing it written helped me accept that I had committed to doing it.