Investing immaturity — a potentially costly condition that a surprising number of investors exhibit — is not easy to identify during the early stages of accumulating wealth when there is not much to lose. However, as time goes on and more wealth is built, immaturity can be spotted quickly in a conversation.
I want to be careful in using the term investing immaturity … I am not insinuating that someone is juvenile, what I am suggesting is that the way some investors think about their money and their investments can at times be immature.
In fact, what I have found in most people who are experiencing investing immaturity is that once they are provided more education about how to invest, they often move past this stage into more advanced wealth strategies.
The best way to look at this is that like anything: We only know what we know. In other words, the root cause of investing immaturity for most people is simply not knowing any different.
What follows are five signs of investor immaturity. For someone wanting to reach the next level of growing and protecting their wealth, these are behaviors to avoid.
1. Return Chasing
Recency bias can be a symptom of investing immaturity. This can be defined as a tendency to be critical of one’s investment performance, or a “grass is greener” feeling, when comparing their earnings (or losses) to another investment that may have done better during a specific period of time.
An example of this is when an investor experiences a loss in one of their investments while learning of another investment from a friend or a Google search that had a gain, and then acting on that information to chase the return.
This behavior is a blatant disregard of everything we know about proper diversification and risk management fundamentals. What a mature investor realizes is that performance is like a photograph of a specific point in time with specific market conditions that are unlikely to be repeated in exactly the same way in the future.
The fact is that if it were truly that simple, everyone would simply hold that one investment (whatever that investment is), but it is not — which is why we diversify our portfolios.
2. Fee Sensitivity
Fee sensitivity is not as common as chasing returns, but it is a core trait of investing immaturity. Picture this: You have fund A, which is a U.S. equity fund, and fund B, which is an emerging markets fund. Fund A has a fee of 50 basis points annually, while fund B is 200 basis points annually.
Someone with fee sensitivity will outright reject the idea of investing in fund B without any consideration for how such a fund could benefit or enhance their portfolio’s long-term returns.
The truth is that higher fees don’t always translate to a bad investment. Some investments are simply more difficult to manage due to a number of factors. For some investments, there is less public information available about the underlining investment, which results in having to do more research and at times having feet on the ground in foreign countries in an effort to get a better sense of operations, management and supply chains.
This more labor-intensive research adds to the cost of managing such an investment, but it shouldn’t be an absolute reason to not hold the investment.
Comparing fees within the same asset class and product types makes sense, but fees should not be used to compare investments that are of different asset classes or objectives.
3. Liquidity Blinders
Those with investing immaturity are often blinded by the holding periods and restrictions of certain product types that lead them away from using any investment without liquidity.
For those with liquidity blinders, they often miss out on the benefits of using an investment with less liquidity by overweighting the importance of not having 100% access to their money.
Public market investments use public exchanges, allowing for easy trading to move in and out of such investments. Meanwhile, interval funds, annuities and private market investments are examples of investments that are not publicly traded and aren’t as easily liquidated, carrying with them certain restrictions that can vary from one offering to another.
Contrasting the differences between one investment type and another and highlighting their benefits and characteristics allows for broader diversification and better risk management.
The characteristics that make these investments different are generally what make them useful in enhancing and diversifying a portfolio.
Of course, you should never use one product for 100% of your money, and having access to cash sufficient to meet your needs is a priority in building a portfolio.
4. Product Biases
Investing immaturity often carries with it biases about certain products based on unsubstantiated opinions of others. I hear comments like, “I don’t like annuities,” and when asked why, the response is often, “I heard they aren’t good.” It’s a human phenomenon that, after 28 years of being a financial adviser, I simply cannot explain.
Human beings tend to use other people’s opinions to fill gaps in their own knowledge or understanding of something, which can leave them with a distorted belief about the truth. Annuities are just an example. I hear similar comments about nearly every product type, and in the majority of these conversations the response is similar and has the same origin.
It is true that every product has its benefits and its flaws. There are no unicorns when it comes to investments, which underscores the importance of not having investing immaturity.
5. Outcome Confusion
Investing immaturity causes confusion about what outcome we as investors are ultimately trying to achieve.
Consider a pilot, who must use the majority of the plane’s fuel at takeoff to push the engines to defy gravity and reach a certain altitude and speed. Once reaching altitude, the pilot adjusts for the flying conditions while relying on the plane’s instruments to maintain speed, altitude and course. When nearing the destination, the pilot prepares for landing by manipulating speed and adopting an approach strategy determined by the conditions to ultimately get safely on the ground.
Now imagine a pilot who — rather than being focused on arriving safely at their destination — is instead focused on which way the wind is blowing to get the greatest tail wind, with the goal of flying as fast as possible until they get tired. Only then does the pilot begin to look for a runway.
Seems ridiculous, I know, but this is an example of how many people view their investments. They want to grow their money without consideration for how and when they will ultimately use it. Focusing on the wrong things can lead you to the wrong outcome.
Just like a flight plan, a retirement plan has a specific timeline for using various product types and risk-management strategies to safely ease into retirement. There is no exact science or perfect way of going about this, but investor immaturity — like any other deficiency — must be overcome to effectively navigate markets, headwinds, opinions and emotional decision making.
Everyone reacts immaturely from time to time. We all have fears and opinions to overcome, however, when we don’t acknowledge them and don’t work on overcoming them, they can doom our results long-term.
To learn more about how to avoid these investment mistakes, visit brianskrobonja.com.
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Founder & President, Skrobonja Financial Group LLC
Brian Skrobonja is an author, blogger, podcaster and speaker. He is the founder of St. Louis Missouri-based wealth management firm Skrobonja Financial Group LLC. His goal is to help his audience discover the root of their beliefs about money and challenge them to think differently to reach their goals. Brian is the author of three books, the Common Sense podcast and blog. In 2017 and 2019 Brian received the award for Best Wealth Manager and in 2018 the Future 50 St. Louis Small Business.