INVESTORS ARE HUMANS, too. In the rest of our life, we readily acknowledge that emotions play a huge role. But when handling money, we insist we’re entirely rational. Really? Here are 10 headscratchers that suggest otherwise:
- Why do we concede that the car sitting out in the rain is a depreciating asset, and yet we’re convinced that the house sitting in the rain is a great investment?
- Why do people, who are so optimistic about everything else, rush to claim Social Security at age 62, suggesting they’re pessimistic about their own life expectancy?
- Why do we go out of our way to collect tax deductions, when these tax deductions might save us just 22 cents for every $1 we spend?
- Why will people readily admit that their family life is in turmoil, and yet they’d never admit that their finances are a disaster?
- Why do we buy the extended warranty in case the $300 television breaks, but we fail to buy disability, health and life insurance in case our body breaks?
- Why do folks, who would never dream of going into debt to buy stocks, think it’s entirely prudent to borrow 95% of the purchase price when they buy a house?
- Why do we build diversified portfolios—and then get surprised when all of our investments don’t go up at the same time?
- Why do folks flock to exchange-traded index funds for their low costs and enviable tax efficiency, and then throw away both advantages by rapidly trading their funds?
- Why do we spend hours researching which $150 hotel room to book, and yet we’ll invest tens of thousands of dollars based on a five-minute cold call from a broker?
- Why do we concede that we’d have no chance against a professional tennis player, and yet we imagine we can beat the market averages, even as most professional money managers fail?