Behave Your Way to Investment Success

A relatively new branch offinance, behavioral financehas identified manyother factors that affectour long-term investmentsuccess. Physician-investors should beaware of the following behaviors:

•Procrastination. The stock marketdoes not climb steadily; most of thetime it drifts. During such times, physician-investors should not procrastinateby watching TV or cleaning out thegarage. Instead, they should get theirportfolio in order.

Unpredictable spikes, which occurevery once in a while, generate most ofthe long-term returns, and the only wayto make money in the stock market is tobe invested with a properly structuredportfolio most of the time, except whenthe market is wildly overvalued. Unfortunately,the only time physician-investorsseem to feel an urgency to actis when it is exactly the wrong time—after the market has made the headlinesby sharply turning.

•Overconfidence. In all aspectsof life, people overestimate their ownabilities and are overconfident abouttheir knowledge, a major cause ofmany investment disasters. Learninghow to successfully invest takes yearsof education and experience. Yet mostphysician-investors seem to think thatall it takes is watching CNBC, readinga few financial magazines for minutesa week, or sitting through the salespitch of a broker.

Meanwhile, people do not hesitate tospend hours choosing the right vacuumcleaner and additional time finding it for$10 less. For some reason, they also donot hesitate to invest thousands of dollarsin the stock of a company when theyvaguely know what business the companyis in and almost nothing more.

•Conservatism. Although it mayseem like an antidote to overconfidence,conservatism can be as much of a behavioralproblem. In general, mostphysician-investors need to take somerisk and invest a good part of their savingsin the stock market. Otherwise,they will not be able to accumulate thenecessary nest egg for retirement or generatethe necessary income from thatsavings that will keep up with inflationduring their retirement. Yet many physician-investors, especially retirees, try toexclusively or heavily rely on bonds.

Most bonds produce a constantnominal dollar stream of income overtime, but the buying power of thisstream, as well as that of the principal abond returns at maturity can declinesignificantly over time because of inflation.Taking inflation into consideration,bonds are not necessarily the idealconservative investments.

•Anchoring. How often have mostof us lost money in a stock and thenheld on to it in the face of deterioratingoperating results in the hope that thestock might still get back to our purchaseprice and give us a chance tobreak even? By anchoring or fixating onan irrelevant number for the psychologicalsatisfaction of not taking a loss,physician-investors often forsake viableopportunities to invest money in anotherstock and earning a good return.

We are all guilty of many of thesebehavioral finance mistakes. If you arehonest with yourself and realisticallyanalyze your past behavior and yournatural inclinations, you just may beable to behave your way to long-terminvestment success.

Chandan Sengupta, author of The Only

Proven Road to Investment Success (John

Wiley; 2001) and Financial Modeling Using

Excel and VBA (John Wiley; 2004), currently

teaches finance at the Fordham University

Graduate School of Business and consults with individuals

on financial planning and investment management. He welcomes

questions or comments at chandansen@aol.com.