Emotional Investing

The US equity markets have been setting records recently and are sitting near all time highs at the time of this post. Are you excited or concerned? Either way, if you’re led by your emotions when investing, you will more than likely fail.

First Step: Tune Out The Noise

The majority of the headlines we see are not designed to make sure we are successful in our financial life. Most of the time, they are designed to keep you listening, watching, or reading, and often that involves sensationalizing the information. This can invoke fear or false hope.

Learn From The Mistakes Of Others

Here’s a famous history lesson for you from 1720. Sir Isaac Newton is arguably one of the smartest people in history. Among other things, he invented calculus and conceptualized the three laws of motion. However, with investing, he let his emotions get the best of him. He owned shares in the South Sea Company, which was the hottest stock in England at that time. Everything was red hot, and he was feeling it, so he sold his shares and actually made a 100% profit.

Just months later, he was swept up in the continued exuberance and as the stock prices continued to rise, he jumped back in, this time at a much higher price. Ultimately, the stock tanked and he ended up losing everything he had invested, equivalent to about 3 million dollars today when adjusted for inflation. So he went from 100% profit, to losing it all. Doesn’t sound very smart now does he? He let his emotions get the best of him and was swayed by the noise, and caught up in the irrational exuberance.

How Can We Avoid This Trap?

We are all susceptible to such mistakes. To help minimize the emotions of investing, it is helpful to understand the psychology of the market cycle.

On the way up it looks like this: hope --> optimism --> thrill --> euphoria all the way to the top. Then as you start to come down it looks like this: complacency --> anxiety --> denial --> panic --> capitulation --> anger --> depression. Then it starts over and we go through it all again.

It is essential maintain proper perspective and prevent your emotions from leading you to try to time the market. Instead, maintain a philosophy of pursuing the long-term and have a plan guided by a sound philosophy, planning strategy and process.

Also, working with a financial professional can help you stay the course, with creating and monitoring an intelligent and dynamic plan.

Consider This

If you had it remained invested in the S&P 500 from January 1997 to the end of 2016, you would have averaged 7.68% per year.*

Missing the 10 best days during that same period drops the return from 7.68% to 4%.

Missing the 20 best days drops the return to 1.57% annualized.

And missing the 40 best days actually results in a loosing money, dropping the return to -2.4% annualized.

Bottom line, it’s not timing the market, it’s time IN the market.

Final Thoughts

 As Warren Buffett says, “the market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people patient people.”  

Stay focused, stay patient and feel free to reach out if you need some perspective.

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*Data from JP Morgan can be found HERE >>