2 types of investors that almost always find themselves broke

Investing is an important piece of the puzzle when it comes to our long-term dreams and goals. It is hard to save enough money to hit your retirement goals, college funding goals, and other long-term desires if your investment strategy consists of under the mattress or the coffee can buried in the back yard.

There are two character qualities that will almost guarantee that you will be unsuccessful.

The fearful investor

The first of these qualities is fear. Fear is a dangerous companion for the investor. It will be a constant voice whispering in your ear. “The market was down again yesterday.”  “The economy is heading for another recession.” “Too many people are out of work.” And on and on it will go.

The newsInvestor

Frankly, one big source of these fears are your national news networks. Nothing against the nightly news or CNN or Foxnews, but understand that there is an old axiom that says bad news sells. This is very true. Imagine tuning into your favorite news source and the lead story is “Well there isn’t really much to talk about today. All the nations are pretty much getting along. The economy is doing well. No major crimes today.  The weather will be very pleasant over the entire country.” We might be happy to hear some good news, but we’d also be pretty quickly changing the channel to re-runs of our favorite sit-com. Bad news keeps us tuned in.

I am not saying that if you are prone to fear that you should stop watching the news. It is important that we be informed citizens. I am saying though that we need to be wise in understanding how the news process works. The market was down 400 points will be the lead headline on the front of the newspaper. The next day when it is up 200, you’ll find the story buried on page 4 of the business section. If your prime investment counselor is the nightly news, you will live in constant fear.

The real problem with fear

Fear will lead you to make decisions based on emotions rather than facts. We all have lived through some very volatile and painful times in the last 5 years. 2008 was a very scary time if you were an investor. The S&P 500 which consists of  most of our major companies was down over 38% that year. And yet in 2009 it was actually up over 26% and then went up another 11% the following year.

The problem with fear is that it convinces you to sell at the worst possible time. Many people decided to cut their losses in the despair we saw in 2008 and as a result lost thousands of dollars. Had they hung in there though they would have made most of that back over the next couple years.

The greedy investor

The other type of investor sure to crash is the greedy investor.

A broken risk meter

Greedy investors go broke because they are too speculative. They do a very poor job of evaluating risk. They see only the potential gain and never consider a potential loss.

The nature of the stock market is that it ebbs and flows over time. Some days it is up. Some days it is down. The general trend though over many years is up which is why it is a good place to put your money for long-term goals. That ebb and flow is very much tied to risk. The more risk you are willing to take the greater your potential gain, but also the greater the potential to lose everything you own. Investing in those two guys next door that are starting a company building computers in their garage might just yield millions if their names are Jobs and Wozniak and the computers have a little Apple logo on them. But on the other hand you are much more likely to lose it all if they aren’t so successful.

The problem is the greedy tend to only see the Apples of the world and look past the hundreds of others that fail in trying to do the same thing.

Impatience

In addition to failing to understand risk, the greedy investor also frequently suffers from a lack of patience. They want microwave results and unfortunately successful investing is much more of a crock pot.  Proverbs 13:11 says “Wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows over time.” NLT

If you see investing as a way to make a lot of money quickly, you will very likely be disappointed and more likely find yourself a broke investor.

So what kind of investor succeeds

Frankly the answer lies somewhere in the middle. We all need a little bit of each of these investors in us if we are to be successful. We need just a little bit of the “greedy investor” so that we are motivated to take enough risk to make money over time. That money in the mattress has little risk, but it also does not grow.

But at the same time we need a little of that “fearful investor” so that we can properly evaluate risk.

The path to success

I believe the best path to success consists of:

  • Get your debts paid off and save up for emergencies so you are on solid ground financially for your day-to-day living.
  • Plan for the long-term; don’t be impatient
  • Invest in items that have long track records of success:  Things like quality mutual funds that have proven to make money over a period of many years or real estate that is located in a good growing area.
  • Be watchful over your investments. You want to review them from time to time to make sure they are performing as you want, but don’t be checking everyday. You’ll drive yourself crazy.
  • Find a quality investment counselor that will help you invest in ways that fit your needs and your personality
  • Allow time to work its magic.

Have you allowed fear or greed to play too big of a role in your financial decisions?

Photo credit: Tax credits (creative commons)

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