The following is a guest post from Neal Frankle, a Certified Financial Planner™ based out of Los Angeles and the brains behind Wealth Pilgrim. One of Neal’s recent posts was his detailed CIT Bank review. Neal is one of the very few personal finance bloggers who doesn’t find Control Your Cash offensive, or at least manages to keep his disgust quiet. Plus, he knows money better than all of us combined. And despite his line of work, he can write as clearly and inspirationally as anyone. Take it away, Neal:
Intelligence is great but it can also be a problem sometimes. And when it comes to investing, it can be a downright catastrophe. In fact, I’ve come to the conclusion that blockheads are much better investors. This is especially true when it comes to those people who are investing so they have enough money to retire.
Am I saying you should drop a tab of acid and trip out before making investment decisions? Not really. I’m suggesting that you are best served by deciding on an investment strategy and sticking with it. This is very hard to do – especially for smart folks. Why?
Bright people have good experiences in life using their intelligence. They understand that they’ll do better if they use their brain power before making a move. That’s OK. But the problem is that they think they can use the same tools (their smarts) and have a similar happy result with their stash. Wrong.
What happens is that people who are smart often “override” their investment strategy for one reason or another and usually find their wallets a little bit lighter as a result. Bad tone.
“Are you smart? Well, are you….punk?”
You might think this is a problem for others and it’s something you don’t have to worry about. But I suggest you reconsider. Have you ever told yourself:
“Everyone is buying this stock. I better jump on it while I have the chance!”(Remember Facebook?)
“Janice told me to sell she sold her stock. She’s really smart. She’s a dentist. I better sell too.”
“I just saw that the economy gained 100,000 jobs last month. Things are really turning around. Time to dive in with both feet!”
“Romney is going to get elected. As soon as that happens, the market is going to tank. I better sell while I still can.”
When I was learning how to become a financial advisor, I was warned against making these mistakes but I fell into these traps with my own money anyway. It rarely turned out well. That’s because these moves aren’t based on strategy. They are based on speculation and that’s the point.
Investing is a long-term deal – not speculation. If you want to achieve long-term success, you can’t speculate based on how you interpret current events. Sure you might connect with the ball once in a while. But you’ll strike out far more often and it will cost you big time pain.
Don’t Confuse Intelligence and Speculation
People call me up all the time and tell me they want to make some move based on how they think the future will unfold. No matter if I feel it makes sense or not, I always remind them that they are speculating and that speculation is risky. As long as they are willing to take that risk, I am fine with it.
Intelligence can help you make the best tax decisions. Intelligence can help you make the best estate planning decisions. Your smarts can even help you fix your broken toilet. That’s because these issues deal with (relatively) fixed rules on how the world works. But the investment world doesn’t operate under the same conditions. Investments deal with the future which is unknown and unknowable. And all the intelligence in the world can’t change this.
How You Should Use Your Genius Brain Power
As I said, the best way to put your cleverness to work is to find the right strategy and then let the strategy make the call on which investments to make.
When it comes to deciding how to invest money I’m a blockhead. I have defined my objectives and found the strategy that I believe achieves those goals best. I am willing to be wrong and I don’t tweak my system or override it depending on how the wind blows that day. That’s why I’m a blockhead. I let the strategy work. I do what it tells me to do.
My suggestion for you is to make sure you have the right investment strategy and stick to it. Expect imperfection. There will be times when the approach you use will lose money. That goes with the territory. But this is a far better method than relying on intuition, speculation, or worse yet, “intelligence”.