Investors are humans, too.
In other parts of our life, we readily acknowledge that emotions play a huge role. But when handling money, we insist that weâre entirely rational. Really? Here are 10 headscratchers that suggest otherwise:
1. Why do we concede that the car sitting out in the rain is a depreciating asset, and yet weâre convinced that the house sitting in the rain is a great investment?
2. Why do people, who are so optimistic about everything else, rush to claim Social Security at age 62, suggesting theyâre pessimistic about their own life expectancy?
3. Why do we go out of our way to collect tax deductions, when these tax deductions might save us just 25 cents for every $1 we spend?
4. Why will people readily admit that their family life is in turmoil, and yet theyâd never admit that their finances are a disaster?
5. Why do we buy the extended warranty in case the $300 television breaks, but we fail to buy disability, health and life insurance in case our body breaks?
6. Why do folks, who would never dream of going into debt to buy stocks, think itâs entirely prudent to borrow 95% of the purchase price when they buy a house?
7. Why do we build diversified portfolios â and then get surprised when all of our investments donât go up at the same time?
8. Why do folks flock to exchange traded index funds for their low costs and enviable tax efficiency, and then throw away both advantages by rapidly trading their funds?
9. Why do we spend hours researching which $100 hotel room to book, and yet weâll invest tens of thousands of dollars based on a five-minute cold call from a broker?
10. Why do we concede that weâd have no chance against a professional tennis player, and yet we imagine we can beat the market averages, even as most professional money managers fail?
Jonathan Clements is the former personal-finance columnist of The Wall Street Journal and author of the âJonathan Clements Money Guide 2016.â Follow him on Twitter and on Facebook.