We are now in the three weeks, from the 17th day of the Hebrew month of Tammuz to the 9th day of the Hebrew month of Av (also known as Tisha b’Av), which is a period of mourning to commemorate the destruction of the Jewish Temple. Jews traditionally observe several mourning customs, including refraining from music, weddings, parties, public celebrations, haircuts, shaving, and partaking in dangerous activities.
I’ll leave the discourse about the myriads of Jewish considerations over these customs to the far more qualified rabbis in our communities. However, I do feel comfortable opining on the custom of avoiding dangerous activities, within the realm of investing.
There are a variety of dangers associated with investing. After all, if there was no risk, there would be no reward. In fact, an important component of successful investing is to understand the relationship between risk and reward. Taking prudent risks can lead to higher possible returns. Too much risk, though, can put a person’s financial future in jeopardy. Sadly, many families don’t understand how to minimize dangers within their portfolio.
In that vein, I will spend the next few days sharing some dangers to which an investor’s portfolio is susceptible and how to mitigate them.
The first is The danger of behavior: Every human is emotionally charged. Some people get emotional about politics, others about certain industries, or a company’s business practices. Your emotions and behavior are one of the biggest risks to your portfolio.
Investors tend to make drastic decisions when they are feeling scared, greedy, or impatient. Unfortunately, these impulsive moves rarely, if ever, work out. Emotional decisions have no place in the world of successful investing. When it comes to emotions, the best approach is to keep them in check. This can be done by automating as much of your investment process as possible.
One solution to over come the risk of bad investing behavior is Dollar-cost averaging, which is the process of routinely adding money to investments at regular intervals. Dollar-cost averaging is a seamless way to build wealth over time. As Warren Buffett once said, “Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” Automation can help facilitate that temperament.