The Behavior Gap: Why Knowing Does Not Mean Doing Better

This advice matters because most people think that investment represents a math test: although math can help investors make informed decisions, emotions may cause investors to make poor decisions. In this blog, I will reveal how fear, greed, and herd instinct destroy smart plans and offer three simple rules to make calm decisions instead of being compelled by passions.

In short, financial success depends less on smarts but more on emotional control. While financial advice often fails due to a lack of knowledge, many people fail because, although they know the right thing to do, their emotions prevent them from doing so. For instance, common advice teaches investors to buy low and sell high; however, who would want to buy low whenever news screams "crash"? Therefore, this gap between intelligence and action is where fear, greed, and herd instincts diminish solid strategy.

Fear: The False Exit Sign

Fear turns market volatility into a false exit sign. Consider this: two friends, each with $100,000. John buys and holds his investment in the S&P 500, while Sam sells whenever the market crashes and re-enters whenever the market recovers. In ten years, John will have around $260,000 while Sam will have $130,000. Sam earned 50% less.

As illustrated, panic can cause investors to miss out on compounding. Although it may have seemed rational to sell when the graph is red, resisting anxiety can pay dividends because holding a stock through the ups and downs helps compounding.

Greed: The Moving Goalpost

Greed sneakily moves goalposts. Following a stock doubling, Ana bought more of the stock, convinced the trend would continue. The past seems like a prediction of the future. It's not.

Think of a hyped stock like a fast car -- although it gets to the destination faster, there's a higher chance of a crash. Therefore, pick a limit today, a max percentage of portfolio size or a quarterly goal, because if you do not, you risk losing big.

Herd Instinct: Buy High, Sell Low

Herd instinct tempts you to buy high and sell low. In January 2021, when GameStop went from $20 to $400, millions bought at $300 because "everyone else was". When the stock crashed to $40, those same investors sold at a massive loss. The crowd isn't always right. Although everyone else was buying GameStop, it doesn't mean you should.

Wear Buffett's lesson like a belt that keeps your investments secure.

3 Unbreakable Rules

Technical analysis matters. Strategy matters. But most mistakes occur when feelings override plans. Therefore, follow these 3 simple rules unbreakable by emotions: