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Why is Investing Difficult

Financial Planning Insights Behavioral Finance Retirement Planning

Well, first, the mechanics of investing can be really quite simple.  Most of the wealth in the world is created by owning a company.  If you don’t own your own company, then you should own a part of somebody else’s company – or, better yet, parts of hundreds of companies.  That way, if one of those companies gets into trouble, it won’t have as great of an impact on you.  Over time, the growth of the companies you own - added to the income stream from the profits they share with you - provides you with the return you need to create real wealth and maintain your standard of living in the face of long-term inflation.

Before you begin investing you should make sure that you are a long-term investor.  You should also be in a position financially to withstand any short-term turmoil in the economy.  This means keeping at least 6 months of expenses stashed in a savings account or (what we call an emergency fund) and having your debt under control or, even better, paid off.  By having your financial house in order, you are better prepared to withstand the market’s short-term gyrations and volatility.

So, if the mechanics are so simple, why is it so difficult for investors to grow their investments?   It’s because their emotions get in the way.  As humans, we are all hard-wired to avoid losses and preserve what we have.   Unfortunately, in today’s computer-controlled, internet-connected world, there is more volatility and no way for an investor to know when to sell ahead of market declines.  Worse yet, there is no way to know when to buy back the investments ahead of the market rise.  Most individual investors then must be consistently correct on both the sell and the buy - over and over.  This is impossible to do on a long-term consistent basis.

And all of that trading is so unnecessary.  Those hundreds of companies that you own are going to go up over time, on average, because they have to.  If they don’t, those companies won’t be able to raise new funds for expansion and will be put out of business.

So, why do our emotions get in the way of successful investing?  Simple fear and greed.  Fear that the disaster of the day is different than any time in the past (which it isn’t), and greed in our desire to not miss out on the opportunity to make money when everyone else is.  


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