Instinctive human behavior can cause us to make bad decisions – selling investments in a panic when the market is low (even though we know we may lose money), believing we’re better than the next guy and trying to beat the market (even though we know it’s nigh impossible), and sometimes doing nothing: paralyzed by uncertainty (even though we know we should act now).
It’s not just individuals who act this way. According to Richard Thaler (professor of economics and behavioral science at the Booth School of Business at the University of Chicago) too much caution hinders a turn around:
• Congress is delaying necessary infrastructural improvements in the US due to the uncertainty of foreign economies – even though the need for roads and bridges will only grow. In fact, now is the time to address this problem, while construction and borrowing costs are low.
• Corporations are hoarding large amounts of cash, frozen with doubt: Google is holding more than $39 billion in cash. Thaler questions a company that can’t find an investment to earn above the tiny return on its cash.
Thaler claims actions like these may be impeding our ability to turn the market around.
It’s tough to keep a cool head with the sizzling news headlines out there, which is why we recommend coming up with a plan and sticking to it. Set a goal in your Betterment account and focus on the long-term outcome.
Better yet, set up auto-deposit (based on Betterment’s advice) and you’ll be less likely to have a knee-jerk reaction to a sensational headline. Being pro-active (and calm) with your investments will help you achieve your goals faster.
Betterment’s Approach to Financial Advice: An Overview
Achieving your financial goals is only possible if you plan effectively. Saving enough, choosing the right accounts, deciding when you can buy a house or when to retire—all of these are essential decisions even before you build an optimal portfolio.
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Diversification: Winning the War by Losing Battles
Diversification involves knowingly accepting some individual losses in order to gain long-term returns.
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