The Two 'Devils' That Could Ruin Your Portfolio (And How to Beat Them)

Devil investingRight now, there's probably one of two very different devils sitting on your shoulder, whispering in your ear. And it's dictating your every financial move -- either paralyzing you or compelling you to overreact.

And if you're not careful, that nefarious little voice could send your portfolio into the ground.

The devils are greed and fear. And while you certainly understand those emotions in the abstract, you may not recognize how they're specifically affecting your investing behavior.

Greed is that overpowering desire you have to grow your portfolio too quickly. It compels you to take risks that may -- or may not -- pay off.

Fear is that anxiousness you feel when confronting the possibility you might lose money while investing. It convinces you to sacrifice long-term growth because of short-term market fluctuations.

Depending on how the market is faring, one of these devils will rear its head -- or maybe both. In fact, a recent study by Natixis Global Asset Management reported that 80% of financial advisers admit their clients are "torn between a desire to increase returns and the need to keep their investments safe."

The common results of these devils' urgings are similarly twofold: making risky investments in long shots, hoping they'll return 10 times or more in value; or sticking your money in a risk-free investment like Treasury bills -- which have yields so low that they don't keep pace with inflation.

They'll make you trade too often -- or not trade enough. Chase after yield. Or too heavily concentrate investments. Or make any number of notorious investing mistakes caused by emotions.

Don't Ignore Those Devils -- Fight Them

These devils of greed and fear are powerful triggers. But they shouldn't be ignored. Often they're telling you the opposite of what you should be doing.

Sponsored Links

As Warren Buffett famously quipped, investors should "be fearful when others are greedy and greedy when others are fearful."

Meaning if your instincts are to be greedy -- it's probably time to exercise caution. Or if your gut's making you nervous, it's probably an indicator you should be taking more risk.

You also need to be conscious of how these devils might be affecting your thinking when deciding on new investments.

Is that new biotech company you're considering investing in a smart buy, or are you greedily speculating?

Do you really think the world is about to come collapsing down and that gold is the only safe investment -- or are you fearfully buying into what the media (or those selling physical gold) would like you to believe?

Make Friends With Greed and Fear

On a day-to-day basis, you have to find a balance between greed and fear. You need to be somewhat greedy, realizing your portfolio will need to grow over the long term. But you also need to be somewhat fearful, conscious of potential risks and diversifying your money between varieties of asset classes as a result.

5 U.S. Businesses That Ought to Be Ashamed of Themselves
See Gallery
The Two 'Devils' That Could Ruin Your Portfolio (And How to Beat Them)

Wal-Mart (WMT)
Those being exploited: employees, general public

What's the big deal?: It's no secret that Wal-Mart has been the ire of organized labor for years. The company's anti-union stamce, and its salary and benefits programs for employees pales in comparison to those offered at rivals like Costco. In addition, the company has been blamed for the commodification of small-town America. Mom-and-pop stores, once the backbone of rural life, have been unable to compete with the price and selection Wal-Mart has to offer.

But that alone isn't why Wal-Mart landed on this list. A recent New York Times story shows that the company has been using bribes to rapidly expand its footprint in Mexico. The country is now home to roughly 20% of Wal-Mart's stores[BS3]. If that wasn't bad enough, it seems as though Wal-Mart officials at the highest level knew about this scheme years ago, but essentially covered it up and swept it under the rug. That's the exact opposite of corporate responsibility.

Goldman Sachs (GS)

Those being exploited: customers

What's the big deal? Let's forget about the recent rant published by former Goldman employee Greg Smith. Instead, let's focus on the fact that a Senate subcommittee singled out the company as representative of the corruption and conflicts of interest that pervaded Wall Street -- and that helped accelerate the Great Recession.

Now, many argue -- with merit -- that every trade is based on different opinions about where investments will head in the future, and proprietary information is often critical to investing success. But this was indicative of a larger problem with the company.

None may serve as a more telling tale than the company's 2010 memo on ethics. It covered all the usuals, like: "Each employee and director should endeavor to deal fairly with the firm's clients." But as fellow Motley Fool writer Morgan Housel pointed out, the document ended with an ominous: "From time to time, the firm may waive certain provisions of this Code." As Morgan suggests, it's crystal clear that ethics are only used when convenient for the company.

Cigarette industry
Those being exploited: customers

What's the big deal? No, cigarettes shouldn't be outlawed because they're dangerous. Making them illegal would set this country on a slippery slope that could lead to the elimination of anything from liquor companies to fast-food chains. Nor should we shy away from holding customers responsible for the consequences of their decisions. That's not why the producers of cancer sticks are included here.

Instead, the tobacco industry deserves a spot on this list for what Frontline called its "intentional deception" of the American public over the past four decades. As Frontline reported, CEOs for seven of the country's biggest cigarette makers went before Congress in 1994 and testified they didn't believe tobacco use was addictive. But internal corporate documents show that the companies had evidence as far back as the 1970s that their products were both addictive and harmful. It's hard to find such clear-cut cases of brazen lying to the public at such high corporate levels.

Chesapeake Energy (CHK)
Those being exploited: shareholders

What's the big deal? When it comes to CEOs with dubious track records, Chesapeake Energy's Aubrey McClendon is in a class of his own. Just this past week, it was revealed that McClendon had secured over $1.1 billion in loans to participate in a program that allowed him to buy personal stakes in his company's wells. Several market pundits are openly questioning whether or not that creates a conflict between McClendon's and shareholders' long-term interests in the company.

But such dealings are old hat for the CEO. In 2007, he owned 5.7% of the company, but margin loans gone bad later forced him to sell almost his entire stake. In 2008, McClendon received an enormous compensation package of $112 million; later that year, the company spent $12 million to buy historical maps from McClendon. It seems clear to me that shareholders are getting the shaft from this company.

Monsanto (MON)
Those being exploited: customers, general public

What's the big deal?: When a team of professionals from MIT and Columbia were recently asked to come up with a simple way to improve the health of Americans, they recommended a diversified regional food economy.

Of course, we all have some level of choice over our diets, but as long as we allow Monsanto to dictate to farmers what kind of seeds can be used, our available choices will be limited. As of 2008, Monsanto had between a 20% and 40% market share in worldwide seeds for corn, soybeans, tomatoes, and onions -- to name a few.

And even if farmers don't use Monsanto seeds or chemicals, they can still suffer when weed-killers drift onto their productive land. The company has its boots not only on farmers' necks, but on those of consumers as well.

Think the list is missing a few candidates -- or that some of these are being included unfairly? Sound off below with your thoughts.

In order to temper both sides and make them work in your favor, you need to have a long-term saving and investing strategy -- one with risks you understand and have the ability to stomach and a long-term historical growth rate you're comfortable with.

That's how you can manipulate these devils into securing you a comfortable retirement.

This article was written by Motley Fool analyst Adam J. Wiederman. Click here to read Adam's free report on the best ways to ensure and plan for a wealthy retirement.

Read Full Story