Since 2009, the markets have made huge strides. While most investors still remember the pain of 2007 and 2008 when the markets were way down, as the markets have risen, those memories are fading. For some who are invested in the market today, it’s fun again with stock prices moving higher. Even so, many remain worried that the markets will go down again.

Up. Up. Up. Down. Down. Down. It’s like a roller coaster. Emotional investors, those who make decisions based on short-term market swings, are often subjected to a difficult ride. When the markets go up, they feel better and buy. When the markets go down, they become more pessimistic and sell. Have you done this? Do you know someone who’s done this?

We all know the formula for success in investing: buy-low and sell-high. That’s no secret. So why is it that so many people struggle with this? What makes it easy to fall prey to becoming an emotional investor? More importantly, if you have become an emotional investor, how can you get your feet back on the ground so you make the best long-term decisions for your family? Here are my perspectives.

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"Today’s investors have more options and education than ever before. But learning doesn’t necessarily create wisdom. I enjoy leading our investment committee to create unique solutions that the guys on TV simply miss."

 

Four Strategies To Combat Emotional Investing

I’ve said, in other articles, that today’s financial media produces so much information, but so little wisdom. Information provides data points that you might include as part of your larger strategy. Wisdom, on the other hand, provides a framework that absolutely should guide your investment choices.

Don’t get me wrong. Good data is crucial to building a great financial strategy. But it’s not enough. A framework, on the other hand, provides a set of guidelines that allow you to make sense of, and make use of, data points.

So what constitutes a good framework? I believe there are four critical parts:

  • Get clarity about your long-term goals
  • Take a long-term perspective
  • Acknowledge that no one can predict the future
  • Take the ride with the right partner

Let’s explore these a bit.

 

Get Clarity About Your Long-Term Goals

The first time you ride a roller coaster, it feels like total chaos. You often cannot see the curves and dips ahead (part of the master design) and they take your breath away. It’s exhilarating. But something strange happens after you ride the same roller coaster 4 or 5 times. It loses its thrill. You already know what’s coming. You’ve felt the dips and curves before and can anticipate them. The surprise is gone. You have clarity.

In the same way, the first step to getting your emotional feet back on the ground is to get clarity about your long-term goals. You know that the markets will give you dips and curves, ups and downs. But that’s not what matters. The reason you invest is to get to something beyond the dips and curves. The ups and downs of market swings are the travails you have to endure to get to what really counts – your goals.

I don’t know about you, but most of my clients invest to ensure they and their loved ones get to live the life they’ve always wanted – no matter what comes. One of the very first exercises we take clients through is an envisioning process to define the life they want to live in the future. Often I hear goals like:

  • I want to retire with the same lifestyle we have today.
  • I want to ensure I do not become a financial burden to loved ones, particularly children.
  • I want to support my children or grandchildren’s education.
  • I want to leave a sizable inheritance to loved ones.
  • I want to enjoy our golden years with good health.
  • I want to make a contribution to a cause or charity that matters to me.

Do these goals sound familiar? Do you have other goals? I encourage you to make a list of the top 10 goals that you feel you absolutely must accomplish. Believe it or not, this is the start of a great investment strategy. 

 

Take A Long-Term Perspective

At King’s Island, just outside of Cincinnati, Ohio, stands The Beast – one of the fastest and longest all-wooden roller coasters in the world. A ride on The Beast begins with a long, slow ascent up a very steep hill that seems to go on forever. The track is clacking as you go up. And then, a click. For a few short seconds, which can feel like an eternity, nothing happens. Then, without warning, the car lurches forward and you plunge headlong toward a tunnel that looks tiny.

From atop the tallest wooden tower of The Beast, where the click happens, riders can see for miles. They have a view of the entire King’s Island park and surrounding forests. It’s quite a scene. But in mere seconds, it’s gone and you’re in the tunnel, which is quite dark.

This is often what it feels like to be an investor in today’s markets. Just when you think you have a view that is comfortable, everything changes. Your investments plummet, and along with them, your perspective.

If you want to get off the emotional roller coaster, you have to focus on your long-term goals. There will be ups and downs. But the long-term investor is usually the winner. Why do I say this? Let’s look at some investment returns in the context of time.

From January 1, 2009, when the Great Recession began to let up, until December 31 of 2016, the S&P 500 index achieved an annualized return, adjusted for inflation and including dividends, of about 12.5%. In other words, since the last recession, we have had quite a strong bull market. $1 invested in the S&P 500 on January 1, 2009 would have grown to $2.57 by the end of December 2016.

On the other hand, the S&P 500’s annualized return starting in January 1, 2000 through December 31, 2016, again adjusted for inflation and including dividends, was only about 2.3%. At this rate, $1 invested in 2000 would have grown to only $1.47. If you go back even farther, let’s say to 1980, the annualized return, adjusted for inflation and including dividends, is somewhere in the middle, at around 8.1%, with a dollar invested in 1980 having grown to $18.27 by now.

Three important lessons can be drawn from these figures:

  1. First, long-term investments in equities can pay off—and can overcome the withering effects of inflation, which has eroded the value of a dollar by two-thirds since 1980. 
  2. Second, while we have seen double digit returns in the last decade, conventional wisdom holds that it is likely returns over the next decade will be much lower and it might be challenging to get even 4-6% returns going forward, with many pundits stating that double-digit returns are a thing of the past. The reality is that we don’t know what future returns will look like. 
  3. Third, while it’s clear that your future returns are dependent on the price you originally pay for investments—buying low and selling high—making these determinations today is more complex and difficult than it has ever been before. 

 

Acknowledge That No One Can Predict The Future

It’s understandable why people want to jump in on a roller coaster ride that is going up. Unfortunately, with today’s technology tools, the average 401(k) investor can make daily or even hourly adjustments to their portfolio. They can log in at work, check the financial news and follow their urge to continue on a ride that seems like it will only go higher.

The fun of watching the markets and the value of your portfolio go up can cause us to forget the pain of the markets going down. We have short-term memories when we should have long-term visions. As Burton Malkiel made clear in his 1973 blockbuster A Random Walk Down Wall Street, no one can predict what the markets will do tomorrow, next week, next month, or next year. Peter Bernstein said that you have to continue to remind yourself that you don’t know.

As a financial professional, I have advanced degrees and a great deal of experience. But I simply cannot predict the future. And if I can’t do it, I sincerely doubt that the people you see on TV or on the Internet can do it either.

What I can do, though, is take the best of evidence-based investing protocols and use them, with input on your individual situation, to design a diversified long-term portfolio that will ride out these ups and downs as successfully as possible. I can also help you understand all of this, not just intellectually, but emotionally, so that you will be more likely to withstand the market’s swings. We do know that the market will go up and it will go down, we just don’t know when.

 

Take The Ride With The Right Partner

All these lessons point to the same conclusion: you are much more likely to achieve the rates of return you desire if you are working with a skilled and experienced financial counselor and partner (especially one who understands you and has built a plan to achieve your unique goals).

An experienced and knowledgeable financial counselor will help you have a plan and structure your portfolio in a way that you can stay the course when things get crazy – either up or down. This will help you avoid jumping in when things are skyrocketing or abandoning ship when the markets tank.

What should you look for in a partner?

  • Someone will who take the time to deeply understand your long-term goals.
  • Someone who can help you identify investment opportunities that offer the potential to earn attractive rates of return under a variety of circumstances and without taking on unnecessary risks.
  • Someone who constructs an investment strategy with realistic assumptions, knowing the ups and downs are coming. This should be built right into the plan. 
  • Someone who will be with you and help you focus on your long-term goals, no matter what the markets might be doing in the short-term.

Most people do not get anywhere near the long-term returns they should receive on their equity investments because they jump in and out too often and at the wrong times. It’s hard for me to stress enough the importance of having someone to help guide you through these times so that you can achieve your goals. 

 

Final Thoughts

If you feel like you’ve been on an emotional and investment roller coaster, I’d welcome the opportunity to discuss your goals. A second set of eyes, looking at choices you’ve made, and a listening ear might be just what you need to put your feet on solid ground.

 

The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.