Sometimes I consider myself a student of the markets. To be clear, I’m not much of a student, but a little self-flattery has gone a long way in helping me learn about investing and portfolio management, and through the bull run of 2010 – 2014, I managed my portfolio well.

Like many people who manage their own retirement portfolios, I stick to a few simple rules:

  • I'm a buy-and-hold investor.
  • I stick to an aggressive portfolio allocation that is suitable for my age and desire to retire no earlier than 65.
  • I rebalance my portfolio up to once a quarter.
  • More than 95 percent of my portfolio is comprised of low-cost, indexed ETFs (exchange-traded funds) and bond funds.
  • I allow myself to seek extraordinary returns on individual investments with up to five percent of my investment portfolio (so far, I haven’t picked a winner).

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Only Human

These rules worked well for me, but now I’m facing my first bear market with significant skin in the game, and predictably, I’m on the edge of misbehaving.

No, I’m not going to sell all my investments and hide the cash under a mattress. But I’m not doing what I’m supposed to do according to my own rules.

I should rebalance my portfolio, but I’m dithering. Normally, I send my husband nagging text messages to get him to invest in his Roth IRA. The one I ought to send him would read, “Please buy $4,000 of a low-cost emerging market ETF. Put the rest in the S&P 500.”

He has received no such text message from me. Though sitting on cash is doing no good for us, I feel safe with a big pile of lazy Benjamins. (To clarify, this money isn't my emergency fund — it’s meant to be invested.)

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The reason I haven't sent this text is because I’m scared to lose money. It’s also the reason I haven’t finished investing in my Roth. International markets are losing money hand over fist, and I’m not overly excited to join in the losses.

Loss Aversion

Behavioral economists call my behavior “loss aversion.” The concept of loss aversion means that losing money feels twice as painful as the happy feeling from gaining money. Never mind that I have every reason to believe that within five years, we’ll have more than made up any money that we’ve lost. Somehow, all the knowledge in the world is doing little to help me overcome my fear of losing money and my desire to maintain control.

Words from the Experts

When I asked Ben Carlson — a chartered financial analyst and author of the blog A Wealth of Common Sense — why I was struggling to rebalance, he said that, “Successful investing always feels uncomfortable at the time.” He also explained that when it comes to seeing long-term returns, risk management (aka not behaving foolishly) is just as important as portfolio construction.

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When it comes down to it, the biggest thing preventing me from following my prescribed rules is my humanity. Instead of acting like a Vulcan, I’m acting like a human. I’m misbehaving.

In his most recent book, Misbehaving, behavioral economist Richard Thaler explains that humans (like me) aren’t as rational as we like to think we are. In the face of losses, we become far more cautious than we would if we didn’t face loss. My loss aversion is nothing if it isn’t human, and by dwelling on it, I’m actually exasperating the problem. Instead of just loss aversion, I’m suffering from myopia, the tendency to over-analyze results.

A Final Thought

Right now, being a successful investor would require me to invest the cash and walk away. Not looking at the investments for several months might help matters. At least, I wouldn’t have the daily pain of a little loss.

My rules for investing are simple, but following the rules is hard. Successful investing isn't simply about picking the hottest stock or timing the market perfectly.

Instead, successful investing is mainly about behaving well when everything within you wants to behave poorly. Will my animal brain win out, or can I behave rationally just long enough to invest? To be honest, I know my rational self will win out. In less than one week, I have a budget meeting with my husband. We will review our spending and whether or not we’ve met our financial goals (including investing). Even though I hate losing money, I hate having to report failure even more.

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Is this the right way to fight my investing emotions? I don’t know. But I can tell you that I’m about to press send on my text message.

Wish me luck — or, better yet, tell me to “live long and prosper.” I could use that Vulcan rationality right about now.

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