Plan To Take Emotion Out Of Investing
When I was approaching fifty years of age, I made a career change from accounting/management into financial planning right on the eve of the “financial crisis of 2008”. I began working at Rather & Kittrell in November 2007 just a few weeks after the U.S. Stock Market reached a record high. The S&P 500 Index then fell from 1,565 on October 9, 2007 to 677 on March 9, 2009. That was a 57% drop in 17 months, and it was another 48 months before it climbed back to the level of October 2007. The index is now at about 2,480 and we have consistently seen record highs reached since the recent presidential election. The 8 ½ years of a rising market have been much more tranquil than the anxiety (sometimes fear) during the plunge to the bottom. Living through these past 10 years as both an advisor and an investor has been valuable for me in helping people make smart decisions with their money.
There are a lot of conflicting views concerning what direction the stock market is going to take over the next few months. Some analysts are convinced that we are on the verge of a bear market where the stock market will drop 25% or more. Others say that we are poised for continued growth and more record high prices. Both of these views are supported with what seems like solid data when you read the articles. Many of these articles remind me of what I was reading/hearing when I started my career in 2007 but only time will tell which view is correct.
I have my own view about where the markets are headed in the near future, but will keep it to myself since I am no better than anyone else at predicting the stock market. I will, however, share some general observations from the past 10 years, and then offer some advice on what an investor should do today.
Prior to the financial crisis the markets had recovered from the dot.com crisis and investors were feeling confident and optimistic for the future. They were comfortable with taking investment risk and their portfolios were weighted heavily in stocks. The financial crisis was quite a shock to their confidence and many wanted out of the stock market completely. During the financial crisis, and for several years afterwards, investors were fearful and pessimistic about the future. They were not comfortable with taking investment risk and their portfolios tended to be more conservative with increased portions in bonds/cash. As the stock market has climbed, and interest rates have remained low, investors tend to have increased their tolerance for risk and added to the stock portion of their portfolio. We all want to think that we use only logic to make financial choices, but it is very difficult to take emotion out of our investing decisions. Studies have shown that the pain we experience in down markets far outweighs the elation of rising markets. We also tend to believe that what is happening today will go on indefinitely. I recall a meeting of our investment committee at the depth of the financial crisis when one of my colleagues stated, “I’m afraid of everything.” None of us are immune to our emotions in decision making.
I believe that now, while the stock market and economy are doing well, is a perfect time to step back and evaluate your long-term investment plan. The stock market will drop sooner or later. You need an investment plan that takes the inevitable ups and downs of the market into account so that you will not react emotionally to those changes. A well formulated plan will allow you to react according t o your plan rather than emotion when there are market changes. If you need help in making a plan, find an advisor who is interested in understanding your goals and concerns. Work with them to establish a plan and to help you stay disciplined within that plan when anxiety, greed, or fear tempt you to make emotional decisions.