Part gambler, part action addict – unless calmed, the aggressive investor will part with his money.
THE LAST TIME AMERICA’S foremost experts checked (OK, maybe they didn’t), no place exists on a fantasy sports website that allows you to bet on Alphabet (ticker: GOOG) or Apple (AAPL) the same way you would on the Denver Broncos and Peyton Manning.
Yet if it doesn’t take its frat boy cues from the world of sport, a certain class of aggressive investors might well use “The Wolf of Wall Street” as its playbook. It’s the kind of macho money behavior that University of Maryland finance professor Francesco D’Acunto outlines in a working paper, “Identity, Overconfidence and Investment Decisions.”
“The salience of male identity – like in the ‘bro’ subculture – increases men’s beliefs of experiencing good outcomes in a game of chance,” D’Acunto says. “Inducing overconfidence similarly makes men take on more risk and invest more.”
So while the aggressive “bro-vestor” may flex his biceps in a way to make Arnold Schwarzenegger jealous – and this is an overwhelmingly male crowd, folks – he could well prove a 98-pound weakling once the dust settles around his portfolio.
Here, investment experts share eight ways to spot the aggressive investor and bring him back to reality. After all, Wall Street isn’t the Las Vegas strip, no matter how much these bros might want to roll the dice.
Too much action, not enough traction. To once again borrow from sports, aggressive investors may be the most juiced when the game is on the line – constantly. “Aggressive investors are generally thought of as individuals staring at their computer screens and trying to catch every single wiggle and jiggle that takes place in the stock market,” says Michael J. Driscoll, clinical professor and senior executive in residence at Adelphi University in Garden City, New York. Here he cites the wisdom of rich guy (and former heavyweight champ) Mike Tyson. “He put it most eloquently when he said, ‘Everyone has a plan ’til they get punched in the mouth.'”
Here’s the story, but where’s the happy ending? Aggressive investors are particularly susceptible to the lure of “story stocks,” says Jim Hardison, branch manager and managing director in the private client group at Stephens, a financial services firm in Little Rock, Arkansas. “These are companies with big ideas but very few fundamentals to back up investors’ hopes. We often see this behavior later in bull markets, when people’s fears have faded.”
Delusions of $100 grand-er. While these investors think of themselves as the smartest guys in the room, it’s really quite the opposite. “These people are typically delusional with their ability to pick an investment and often brag that their prediction skills are better at interpreting financial information more than most investors,” says Jon Ulin, managing principal of Ulin & Co. Wealth Management, a branch office of LPL Financial in Boca Raton, Florida. “Prediction overconfidence often leads investors to underestimate their overall investment risks, which can often end badly.”
Losing the battle of the sexes. Here’s one for the ladies to email their aggressive investing sweeties: “Overconfidence is the bane of many investors and afflicts men more than women,” says Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania. “The investment results of men, however, tend to be worse.” So before you haul out the Hummer, guys, keep this in mind: “Backing up the truck and loading up on a particularly good investment opportunity may mean investing 10 percent of your portfolio in a single stock, not 25 percent.”
Hunch too much. One hallmark of Mr. Aggressive is his strong bias towards following gut feelings on any (or every) investment. “Our best recommendation is to engage with a financial advisor to help take that emotion off the table,” says Kyle Ryan, executive vice president of advisory services at Personal Capital in San Francisco. “It’s important to have third-party advice to decide on the investor’s ultimate goals, so a spouse or family member doesn’t make an impulsive and emotional decision that can possibly negatively impact long-term wealth.”
Street smarts don’t make for educated investors. “Education is vital: Education on historic patterns of market declines, education on the value of diversification and education on the value of not following the herd mentality,” Hardison says. Enter the impartial, deft guidance of a trusted financial advisor. “All these values must be reinforced at regular client meetings in order to curtail overly aggressive investing behaviors.”
Market mistiming. While just about every investment guru from Warren Buffett on down recommends buying stocks and holding on to them, this pack insists on employing the strategy of market timing to enter and exit an investment at the ideal moment. “Aggressive investors may employ market timing, which can have serious consequences to portfolio wealth if you get it wrong,” says Peter Mladina, director of portfolio research for wealth management at Northern Trust, which is headquartered in Chicago. “Market timers need to get it right at least twice: on the way down, and the way up.”
Constantly inconsistent. In the end, the market often rewards those who stick to their guns, especially in light of 2016’s shaky start. “Patience and consistency will ultimately be rewarded in the longer term, in my opinion,” Driscoll says. “But you have to be able to sleep at night, especially if you get punched in the mouth. If you discover that you don’t have the stomach to live through the volatility, lighten up your positions until you can breathe.”
Corrected on Feb. 11, 2016: In a previous version of this story, a quote about the importance of education and receiving good advice from a financial advisor was misattributed. The quote should be attributed to Jim Hardison.
Author: Lou Carlozo
Source: Money. US News: 8 Traits of the Overly Aggressive Investor