Did you ever hear about the famous feud between the Hatfield and the McCoys? They lived in the mountains on the West Virginia/ Kentucky border in the late 1800s. It all began in a dispute over a hog and led to the death of two dozen people over a 20 year period. As time passed the original reasons were lost and the feud became a deadly habit.
Most people are creatures of habit. Some habits are a good thing. It’s a substitute for rethinking a lot of things we do automatically: we shower, brush our teeth and eat breakfast mostly out of habit rather than spending time wondering if we should. It makes our lives easier.
The habit of saving money for retirement is also a good thing. It’s a habit that leads to financial success. But what we do with that money can lead to bad habits. Getting into the habit of investing in the same thing year after year can lead to bad results.
For example, Microsoft (MSFT) has made some people – like its founder Bill Gates – one of the richest men in the world. Adjusted for stock splits, it was $0.10 /share in 1986; today it’s about $54/ share, a gain of over 54000%. However, if you had bought it in 1999 hoping to see that trend continue you could have paid $59/per share. You would still be waiting to break even, having lost money over a 17 year period.
Unfortunately, this is the kind of habit that so many investors exhibit. They may buy stock in a company they work for and develop the habit of sticking with it even if the company has problems. General Electric (GE) has tens of thousands of employees who bought its stock. They saw the price drop from $60/share to $6/share between 2000 and 2009.
They may read about a mutual fund in a magazine or on-line and buy it without doing the appropriate research and add to it out of habit. Habits are a substitute for thinking about our actions. Some habits, like exercise and punctuality are good. But we should avoid falling into the trap of making investment choices out of habit. To do so can lead us to the same fate of the investor who bought Microsoft 17 years ago or GE 16 years ago and is still waiting to get even.
One way to avoid the trap of using habits to make investment choices is to regularly re-examine your investments. Ask yourself if you had cash, would you buy the same things you currently have in your portfolio? If you don’t know the answer, this is the time to get professional guidance from an investment professional, a trusted fiduciary who has your best interests at heart.