As the color of envy, the color of money, and the shade of the more verdant grass on the other side of the fence, green means different things to different investors. But it’s envy in particular that can foul up the best laid financial plans — and let’s face it, there’s a wide disparity between staying and straying the course.
“The best way to get and stay on track is to have a plan,” says Craig Birk, vice president of portfolio management at digital wealth manager Personal Capital. “If you know your portfolio is built for your goals, then you have a plan. If not, you don’t.”
Sounds bonehead simple, right? Then again, investor envy can make a bonehead out of anyone. “People who simply collect various investments at various times are most prone to jealousy and bad timing,” Birk says.
[See: 7 of the Best Stocks to Buy for 2018.]
Investor envy is definitely a hot topic now given the meteoric rise of bitcoin, and the historic highs hit by companies such as Apple (Nasdaq: AAPL), Amazon.com ( AMZN) and Tesla ( TSLA). Over the last 12 months, those stocks skyrocketed by 49, 54 and 71 percent, respectively.
Watching performances like that and comparing them to your piddling portfolio of treasury bonds and stock in Fitbit ( FIT) (off 10 percent since December 2016) is enough to make anyone throw in the towel — especially if you bought that towel at Macy’s ( M), down 38 percent over the same period.
Yet investor envy goes beyond the numbers and delves into dangerous headspace, where the shareholder laments missing out and begins to feel — and then act — like someone stuck behind velvet rope and shunted from the red carpet.
“When a stock or other investment has a particularly good run-up, it often gathers a lot of media coverage, which could tempt investors to buy in at or near the top,” says financial advisor Nick De Jong with Savant Capital Management in Naperville, Illinois. “The age-old investing advice is to buy low and sell high. This is easier to say than it is to implement in one’s portfolio.”
Envy also complicates matters because it’s a personal emotion — and a skewed one — that pits unlucky you against lucky them. “When comparing to others who have made good investments, investors should keep in mind that they may be comparing the proverbial apples to oranges,” De Jong says. “Investors have varying financial circumstances, goals, risk tolerances, time horizons and knowledge of investments.”
You could also say that to err is human, to envy even more so.
“As human beings we are not purely rational, but succumb to behavioral biases,” says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “But desperate moves, or ones made due to envy, are never a good idea.”
[See: 10 Long-Term Investing Strategies That Work.]
Anyone who can’t remember what they had for breakfast a week ago today ago can resonate with Johnson’s point that “investor envy is somewhat attributable to recency bias, or the behavioral malady that we tend to overweight recent events and underweight events further removed.”
You could also put it like this: Bitcoin breaks the $18,000 ceiling, and the envious investor hits the roof.
While it might not sound nearly as sexy as hitting the cryptocurrency jackpot, “long-term investors should simply follow their investment policy statement and not concern themselves with missing a potential hot investment,” Johnson says. The statement outlines “return objectives and risk tolerance over that client’s relevant time horizon, along with applicable constraints such as liquidity needs and tax circumstances.”
Meanwhile, envy can serve a positive purpose if harnessed and channeled properly, says Anne Drougas, chair of finance, accounting and entrepreneurship department at Dominican University in the Chicago suburb of River Forest, Illinois.
“Constructive envy may motivate investors to learn more about the financial markets to become more prepared investors — and encourage them to take the $5 they spend on Starbucks ( SBUX) every day and invest it toward their retirement accounts,” Drougas says.
She also says that envy often gravitates toward the performance of a particular investment as opposed to investment goals as a whole.
“The average investor is focused on retirement or saving for college or a home — but investor envy can lead people to lose sight of these investment goals,” Drougas says. “Focusing on the run-ups of Apple or Amazon, for example, may lead investors to miss other opportunities that might be more aligned with their risk profiles.”
What’s more, the investor who wins big today might not be so eager to attract the same attention if they lose tomorrow. That is, no one bats a thousand. Thus experts remind envious investors to reflect on whether that train they just missed in fact makes them early to catch the next one.
[See: 13 Ways to Take the Emotions Out of Investing.]
Birk sums it up thus: “It’s always worth remembering that for every story you read about someone who makes a lot of money on something like bitcoin, there are many people who lost money on some other investment that seemed great at the time. There will always be another hot investment.”
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How to Beat Investor Envy originally appeared on usnews.com
