Your Ego is Sabotaging Your Returns: Why 'Surrender' Beats Self-Help for Investors

March 12, 2024, 9:04 a.m. |Mindset |Beginner

In the world of investing, we're often tempted to think that smarter strategies, deeper analysis, and sheer willpower are the keys to outsized returns. However, a recent study and timeless spiritual wisdom suggest the greatest obstacle to portfolio growth may lurk within ourselves – our ego.

Indian Woman Meditation - 2

The study "Do stock retail investors show better portfolio performance when they hold passive ETFs?" (D'Hondt, Elhichou Elmayay, & Petitjeanz, 2022) reveals how the ego, driven by overconfidence, impatience, and fear of failure undermines otherwise rational investors.

The Ego's Investment Traps

  • The Smarter-Than-Thou Syndrome: Convinced of our superior insights, we take unwarranted risks, believing we can consistently outperform the market. This arrogance often leads to rash trades and concentrated positions, amplifying potential losses.
  • Busyness as a Badge of Honor: Feeling the need to constantly act, the ego mistakes frequent buying and selling for skillful investing. This impulsivity translates into higher fees and a greater likelihood of being whipsawed by market volatility.
  • The "I Can't Be Wrong" Curse: When our ego is heavily invested in a particular stock, the emotional cost of admitting a mistake can outweigh financial prudence. This leads to stubbornly holding onto losers, a pattern associated with poor portfolio performance (Odean, 1999; Barber & Odean, 2000).

The Ego's Self-Defeating Logic

The most insidious aspect of the ego is that our attempts to "fix" ourselves often result in a more sophisticated, disguised ego as the saying goes, "trying to solve a problem with our ego just creates a more sophisticated ego." Trying to outsmart your mind with your mind is indeed a futile endeavour!

This resonates with ancient spiritual teachings that warn, "...we try to engineer our own transformation by our own rules and by our own power, which is by definition, therefore, not transformation!" It seems we can in no way engineer or steer our own conversion.

ETFs: Diffusing the Ego's Destructive Energy

The study provides a fascinating counterpoint between the ego-driven stock picker and the ETF investor:

  • Diversification Humbles the Ego: ETFs, through their broad holdings, lessen the temptation to bet everything on a few individual companies, curtailing the ego's desire for control and instant gratification.
  • Taming Trading Impulses: ETF investors demonstrate lower trading volumes, reducing transaction costs and curbing the ego's need to take action based on every short-term market fluctuation.
  • Reducing Risk: The study found that portfolios including ETFs exhibited lower total and systematic risk than those focused primarily on individual stocks.

This suggests that by partially sidelining the ego, investors may be better equipped to navigate market volatility and potential loss.

Evidence-Based Investing: Beyond the Ego's Illusions

True transformation in investing requires stepping outside the ego's limited perspective. This means:

  • Respecting the Limits of Knowledge: Ego-driven investing thrives on illusions of certainty, while true success hinges on the humility to adapt strategies as the market landscape evolves.
  • Non-Attachment Enables Agility: Letting go of the need to defend past choices allows for decisive, even painful, responses to new realities– a hallmark of a disciplined investor.

Systematic Investing: Ego-Proofing Your Portfolio

At our wealth management firm, we understand that ego-based investing creates a constant internal battle, ultimately eroding your potential returns. We help investors short-circuit this destructive cycle through a systematic approach:

  • Data, Not Drama: Statistical models and rigorous quantitative analysis form the bedrock of our decision-making. This minimizes emotional reactions and curbs the ego's tendency to interpret data to fit a desired narrative.
  • Automated Rebalancing: Maintaining a Plan: Regular rebalancing keeps your portfolio aligned with your long-term strategy, reducing the temptation to make impulsive, ego-driven trades in response to fleeting market swings.
  • Factor Investing: Outsmarting Traditional Strategies: We leverage factor funds to capitalize on research-backed market premiums. This approach is a powerful antidote to the ego's desire for "hot stock picks" and the illusion of superior individual insights. In a recent paper, "Factor Investing from Concept to Implementation," in the Journal of Portfolio Management (Van Gelderen, Huij, Kyoserv, 2019) an investor using factors earned a return of 1.1% percent per year over the average traditional actively managed mutual funds. The paper highlights the potential for factor-based strategies to outperform traditional active management.

The Power of an Investment Policy Statement (IPS): An IPS serves as a written playbook for how you and your advisor will navigate various market conditions. This predetermined framework combats the ego's urge to abandon strategy in the heat of the moment. It ensures that decisions are made based on data-driven analysis, not impulsivity or fear.

Key Benefits of an IPS

  • Reduces Ego-Driven Reactions: Having agreed-upon guidelines minimizes the chances of rash, emotional trades and promotes consistency.
  • Protects Long-Term Goals: An IPS focuses on your overarching objectives, not short-term market fluctuations, keeping you committed to your plan regardless of the ego's demands for instant gratification.
  • Enforces Discipline: A well-crafted IPS fosters accountability, helping you maintain a steady course even when markets are volatile and the ego craves action.

By combining evidence-based strategies, factor investing, automated systems, and the guiding principles of an IPS, we help you outsmart the market and your own internal tendencies that sabotage success.

The Takeaway

Investing is ultimately a constant exploration of both the outer market and our inner psychology. Recognizing the ego's self-sabotaging patterns empowers us to seek solutions that circumvent its interference. At times, the most potent investment decision involves surrendering to the wisdom of evidence-based strategies and letting go of ego-driven illusions of control.

Let's stay savvy, investors!


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