Investors have a tendency to abandon their financial plans in extreme market conditions. In the midst of a stock price bubble, investors tend to overweight in stocks at high prices, and after a stock market crash, investors tend to underweight stocks at low prices.
A common argument in favour of financial advice is that since people make emotional decisions to buy high and sell low, they need financial advisors. The first part of this argument makes sense; people do make these mistakes. However, who says that financial advisors steer investors away from these mistakes?
CNN Money Fortune reported on research showing that financial planners tend to be yes-men who reinforce the bad investment behaviours of their clients. This suggests that using an advisor is no guarantee that you’ll make better choices.
So, investors who wish to avoid making emotional investing mistakes seem to have two choices:
1. Learn to control your emotions enough to make rational investing choices, even when everyone around you is making mistakes.
2. Find one of the apparent minority of financial advisors who will actually help protect you from emotional investing mistakes.
I try to use the first solution. It seems to me that if you’re able to judge whether an advisor is keeping your emotions in check, then you probably have already figured out how to control them on your own. Another approach is to just pick an advisor you like and hope that you’ve lucked into one of the good ones, but I don’t recommend this.