Are You in The “Euphoria” Zone?
Ever since I read that Dalbar report which revealed that retirees investing in equity mutual funds earned 77% less than the S&P 500 Index over the last 20 years, I’ve been on a tear to reveal all the reasons why I believe this horrific result occurs.
Because I believe it’s so critical to your relaxing retirement, I’m going to continue with another key reason in this Retirement Coach Strategy of the Week.
Remember that falling prey to any one of these mistakes can land you right in the middle of that statistic.
This one is especially appropriate right now as we close out one of the biggest monthly gains in the stock market since its inception.
What exactly do I mean by Euphoria, and how does it apply to investing?
Well, it’s the financial equivalent of “rapture of the deep” which is a phenomenon that overtakes scuba divers when they dive down really deep.
They get completely blissed out and they lose any adult sense of danger.
The same thing occurs with investment Euphoria.
When you’re in The Euphoria Zone, there’s a complete loss of the idea that principle loss is even a possibility.
The best way to identify this in anyone, including yourself, is when their identification of loss, or their definition of risk, is being outperformed by somebody else!
When all you’re worried about is somebody making more money than you are, you’re in The Euphoria Zone.
What they lose sight of completely is the fact that in order to achieve higher and higher rates of return, they must take on greater and greater amount of principle risk.
1997 to 1999: The “New” Economy
The classic example of this was from 1997 through 1999 when people bought internet stocks at price multiples of 75 to 1!
Even those who were earning good rates of return doing what they were already doing. But, that didn’t matter because others were earning more so they jumped into the pond without a second thought about the potential ramifications.
2005: Real Estate
Another example of this was real estate in 2005. There was no price that was too high to pay for a pre-developed condo in Boca Raton, or Naples Florida because they just knew it would double in price in 3 years!
In hindsight, we now know what the result of this is. Condos in those towns are now selling for 25 to 40 cents on the dollar.
What essentially occurs in The Euphoria Zone is the complete loss of any sense of risk at all. None. And, that’s what leads to irrational investing and the horrific results revealed in the Dalbar Report.
Committed To Your Relaxing Retirement,
The Retirement Coach
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