The late Jim Griswald was an early designer at Piper Aircraft and a legend in modern American aviation. Jim was obsessed with safety but also reportedly told his crew on almost a daily basis, “We can never build a fool-proof airplane because fools are so resourceful.” As one who regularly reads the aviation accident reports, I can attest that Jim was correct.
I have learned people can be equally resourceful at uncovering ways to mess up their financial future. I thought I might list some of the more common areas where investors and pilots tend to sabotage their success.
1 – Emotions. When markets are falling some investors bail out in panic. Though this is usually a bad idea, equally dangerous may be buying quickly just because things suddenly look “cheap.” This action is known as “Trying to catch a falling knife,” which pretty much describes why it may be a bad idea. Generally speaking, the best time to buy or sell stocks for most investors is during times of market calm when high emotions are not skewing your decision. When a pilot faces trouble the first action should be to focus on the fundamentals of flying the plane.
2 – Over-concentration. Diversification does not guarantee success, but it’s designed to help minimize risk. Individual stocks can be unpredictable. Today’s social media giant may be blindsided by tomorrow’s competition. A Fortune 500 company may suddenly find itself in a political storm leading to boycotts. A powerful energy supplier may face unexpected adverse regulations. For these and many more reasons investors should spread their money around. It just makes common sense. Think of it like having two engines on your airplane. It may not be quite as efficient but that extra one sure comes in handy if the first one fails.
3-Inconsistency. Warren Buffet is often called the greatest investor of all time. But let’s not overlook that he started investing at age 11 and continued with it until his current age of 91. Given 80 years of disciplined investing, strict budgeting and compounding interest, I suspect most people would look like financial geniuses to those around them. Great pilots develop consistent habits.
4- Overconfidence. Just as investors have bad days, they also have amazing days. If on those days you let your ego lead you to reckless decisions you may be setting yourself up for some painful lessons. Big egos and fast planes do not lead to safe outcomes.
5- Boredom. Believe it or not, many investors make major mistakes out of boredom. They feel compelled to buy or sell something. Learn to be patient and not too quick to make changes if they aren’t necessary. Flying can be long hours of boredom. Learn to appreciate it because it could be worse.
Flying an airplane safely comes down to following time-tested checklists. It’s amazing how many pilots figure out resourceful ways not to do that. Investing has its own checklists. Learn to follow them and your likelihood of success will improve.
Dan Wyson, CFP® is the author of “The Gold Egg,” and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor.