1. Fear of the Future
The cycle begins with a sense of uncertainty about the future, characterized by questions like: Will there be enough money to maintain my standard of living? How much do I need to save? How do I know what is the best investment? The media and advertisers prey upon this fear of the future in an effort to sell products.
2. Forecast and Predict
Because of this fear of the future, investors have a strong desire to comprehend and predict future events. If someone could tell what is going to happen with inflation, long-term interest rates, share prices, overseas markets, then there would be less to fear about the future from an investment perspective. Along these lines, investors are frequently convinced that someone has the information, power and insight to forecast the future.
3. Track Record Investing
The primary method investors employ to convince themselves that the future can be foretold is through track record investing. This means they look for stock managers who have performed better than the market in the past with the hope that they will continue to have superior performance in the future.
4. Information Overload
In the past, gathering information was the best way to guide prudent investment decisions. However, the current Information Age has created access to so much information that it is easy to become overloaded. Investors feel compelled to understand all of the information: the Internet, books, newpapers, magazines, TV talk shows, advertisements, friends experiences, etc. Indeed, instead of reducing fears, this deluge of information often intensifies doubts about investing.
5. Emotion-Based Decisions
As investors, we never overcome our own humanity. Even though most investors prefer to think that they make investment decisions based upon logic; typically emotions, such as trust, loyalty, hope, greed and fear drive our investment decisions.
6. Breaking the Rules
There are three commonly accepted rules of investing: 1) Own equities 2) Diversify and 3) Rebalance. And, the golden rule of investing is: Buy when prices are low and sell when prices are high. It sounds simple. However, when investors make decisions based on emotions, they wind up breaking these seemingly simple rules, thereby sabotaging their portfolios.
7. Performance Losses
Performance loss means investors fail to capture the returns they expected. Unfortunately, because investors so frequently break the golden rule of investing, they do not receive the rate of return they expected. Investor performance does not equal investment performance. When this effect is compounded over a period of years, an investors potential for reaching financial goals is significantly decreased. Such loss creates additional frustrations and fears about the future, once again initiating the cycle.
THE RESULT: Not Enough Money and No Peace of Mind
The end result of the Investors Dilemma is not having enough money combined with worry, frustration and anxiety about the inability to accomplish meaningful life goals.