1 Important Investing Lesson from A Near-Retired Couple’s Huge US$700,000 Loss

A few days ago, I came across a heart-breaking story about how a couple, who were near retirement, had lost substantial amounts of money in the stock market.

The following’s the story, as recounted by a “financial psychiatrist,” Dr Jancie Dorn, who spoke to the couple:

  • A hardworking mid-western U.S. couple had saved up a million dollars for retirement.
  • During the Global Financial Crisis of 2007-09, the husband, Alan, who was sixty years old, had decided to start investing in stocks even though he had no prior experience in the market.
  • At the time of the crisis, General Motors (GM), an automotive company, was teetering on the edge of bankruptcy.
  • Alan decided to commit US$100,000 to shares of GM. He was convinced that the company would be bailed out by the government and that his investment gain was “assured.”
  • Unfortunately, news came out soon after Alan’s investment that the bailout might not happen.
  • As GM’s shares fell, Alan imagined the thrill of the huge financial reward and held firm.
  • But shares of GM continued to fall and fall, eventually causing Alan to finally sell out at a substantial loss.
  • Sadly, that was not the end of the story. No sooner had he sold his shares, than rumors picked up again that the bailout may happen after all.

The cycle of losses ended up being repeated. Alan bought into GM shares again, imagining the substantial gain he may be getting – only to find out later that the auto manufacturer’s shares would continue to fall far below the price he had paid.

In all, the couple was left with US$700,000 less than what they started with as a result of Alan’s foray into stocks.

Reward sensitivity bias

According to the psychiatrist, Alan had made a few mistakes.

Among them was a psychological bias called reward sensitivity. In a previous article of mine, I had talked about the tendency for investors to easily imagine big rewards while forgetting about the odds that the favourable outcome can actually happen. Unfortunately, this tendency may cause us to take chances with drastic consequences that we may not be able to afford.

Foolish takeaway

The preparation needed to invest may not be hard – it involves studying a company and its business.

The act of investing, though, can be steeped with psychological biases that can throw us off the investing track. Being aware of our psychological biases is the first step toward successful investing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn't own shares in any company mentioned.