Keeping Both Greed and Fear in Check In Retirement Planning

One reason many people fail to reach their long-term financial goals is that they won't follow good advice. Why do people resist good advice? It usually comes down to greed and fear.

Those who always think there is a better deal out there (greedy) tend to make lots of changes and often jump from one bad investment to another. And those who think the world is ending (fearful) tend to sell at the lows and lock in big losses. To be successful, you need to keep your greed and fear in check.

Here are three pieces of good advice that will help you keep your greed and fear under control:

1. Stay balanced. You should consider keeping your investments well balanced between stocks and high quality bonds. In the good years, your greed will be satisfied by the strong stock market returns, and you can brag about it to your friends. And in bad years, your fear will be kept under control as your bonds help preserve the value of your investments, which you can also brag about to your friends.
2. Stay diversified. Once you are balanced, make sure your stock holdings are well diversified. You can wake up in a world of hurt if you let your greed dominate your investment decisions. For instance, when greed dominates, people concentrate their investments in those stocks that have done best over the most recent market cycle. This will cause you to do stupid things like pile into technology stocks in the 1990s or double down on real estate and banking stocks in the 2000s. Often, the hot sectors collapse, and leave investors with huge losses. So don't chase last year's winners because you may end up holding all of next year's losers.
3. Be patient. Even if you are balanced and diversified, expect that your investments will go down in value pretty frequently. That is just how the markets work. If you refuse to accept this reality, then fear will cause you to bail out during market declines. If you sell and lock in losses, you may never reach you goals. Building wealth takes time, and you often just need to wait it out.

Most people who find themselves in a financial crisis have violated one or more of these principles. So do yourself a favor, and be open to following good advice.

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