If there's one thing we learned from the financial crisis -- and all the other crises ever -- it's that we never learn. You can say that about government letting banks get too big to fail. You can say it about banks getting involved in wild and risky trades. And you can say it about us. Buy high and sell low is a sad truth for a reason, you know. Time and again we let panic or euphoria drive our actions in the market and wind up making big, expensive mistakes. Financial adviser and napkin artist Carl Richards writes about human error and emotions in investing for the New York Times.
"There's something sort of fundamental it feels like about human nature. We take the recent past and we project it in the future. Based on something that just happened, we seem to be all too willing to throw out well-crafted, rational investment plans at sort of the drop of a hat based on news," says Richards.
Richards says over the last 15 years he has noticed the same stories popping up -- stories we tell ourselves to rationalize our behavior. Then we look for evidence to support the stories we tell ourselves.
"It may be hard to talk about this one now, but I think 2008, 2009 -- the story we get ourselves so wrapped in is on the way down. People coming in and saying, 'I've just got to get out.' Like, why? Here's the story: 'Have you seen what the market's doing?' That's the story. It's got so many problems in it because we don't know what the market's doing, we only know what it's done. Somehow we tell ourselves the story despite knowing that what's happened in the recent past is no indication of what's going to go on in the future," says Richards. "It's that same, 'I've got to get in on this' or 'I've got to get out' is two sides of the same coin."
Fear and excitement are just two of the emotions people experience when investing. Richards says it's important to give ourselves permission to acknowledge that those types of emotions are normal and human.
"We are hard-wired to get more of those things that give us security and/or pleasure and hard-wired, almost genetically, to get away from anything that's causing us pain. So I think fear, there's greed, all the societal issues of what are your neighbors doing -- we all sort of chuckle at that. 'That's high school peer pressure sort of stuff.' 'I'm immune to that.' No we're not," says Richards.
Richards says there's only so many ways to say to investors: Build a rational plan based on your goals and stick with it. "That's the only story that matters. If your goals change, your life changes a little bit, revisit the plan. If the market changes, go back to the garden."
Richards says investors may need to make mistakes themselves before they realize that risk and reward -- that's a fundamental law; everytime you try to break it, it breaks you.