By Brandon Miller, CFP–
If you have money in the stock market—either through individual investments or your retirement account—congratulations. Your investments are probably doing relatively fine compared with the Category 5 turmoil we’re experiencing right now.
How can that be, you ask? Don’t markets reflect what’s happening in the world?
Well, yes and no. It’s been said that the market only has two real drivers: fear and greed. Typically, when investors are afraid of losing money, they sell. When they are making money, they want more.
Uncertainty can cause fear, which can lead to sell-offs and market downturns. That’s what we witnessed earlier this year when the pandemic hit our shores and investors hit the panic button. The market tanked because everyone was afraid of losing money.
But then that second driver kicked in. Some investors realized that certain companies are thriving in this new world and other solid stocks were undervalued. The indices started ticking up when lots of people realized that they could make lots of money even during this chaos.
We still have moments of uncertainty that can cause a temporary tailspin for stocks, such as when states delay or reverse their re-openings. But we now have the advantage of knowing that COVID-19 exists and that it will have far-reaching consequences in all corners of the globe. Being clear-eyed about that lessens the fear. Which, of course, opens the door for greed to come in.
Now you may be thinking, where does this seemingly upside-down movement of the market leave me?
If you are the Oracle of Omaha, better known as Warren Buffett, you try to be “fearful when others are greedy and to be greedy only when they are fearful.” That’s a brave approach, probably made easier by being mega-rich. But ordinary investors are more likely to get swept up in a herd mentality that buys when prices are rising and sells when they’re falling. And that’s because, we can’t help being human.
Money is not simply a green piece of paper or numbers on an account statement. Money is a very emotional thing, representing our hopes and dreams. When our balances plummet, we see a delayed retirement, our fantasy of being self-employed evaporate, or lesser education for our kids. When the numbers are artificially high, we’re sure we can afford that party lodge in Palm Springs.
It’s hard to be cold-blooded about something so core to who you are. But investing based on your emotions—be that fear or greed—isn’t exactly a winning strategy for most of us. So, here are two ways to inject a little more rationality into your investment decisions.
The first suggestion is to write down your investment plan and put it into action, of course. Just writing down goals makes you 42% more likely to achieve them (according to a study conducted by Dr. Gail Matthews at the Dominican University of California). What’s more, a plan gives you a guide for how to act, so you’re not left to react when life throws you a curve. It can even help you to be proactive. For example, setting a target price for a stock ahead of time makes you more likely to sell when that price is reached vs. having no price in mind and possibly missing a lucrative opportunity.
If creating a plan yourself doesn’t sound all that appealing, you may want to consider suggestion two, which is to have a professional help you make investment decisions. Research by Dalbar shows that investment return consistently beats investor return, something they call the behavior gap. An outside advisor can close that gap by helping you to stay balanced and on track. Hey, even financial planners hire financial planners because we know how easy it is to have blind spots about ourselves. And a professional offers added benefits, such as helping you to consider new approaches or investments for meeting your goals or pointing out what’s wrong with that foolproof get-rich-quick scheme of yours.
Whether through a written plan or a financial professional, putting a little distance between you and your money can help you to make investment decisions based on your goals, and not an endless cycle of fear and greed.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Published on July 16, 2020
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