Managing Emotions in Investing
/By: Uziel Gomez
Note from Shawn:
So far in 2022, the stock market is off to a rocky start. Concerns and worries are everywhere from Ukraine, to runaway inflation, to supply chain dislocations, to mortgage rates rising, to concerns about a recession, and so on. Markets may go down further. But this is part of being an investor and the risk we take for the returns we enjoy by owning companies.
It is at times like these that I like to look at the chart below. You may believe that the market will go down and you could be right. The real tricky part is knowing when to get back in. If you miss just a few days of the recovery, you miss out on the lion’s share of the return for the year. If you missed out on just 5 days over a 20-year period, your nest egg would be cut by almost 40%.
We have been having many conversations with our clients around this topic. To prepare our clients for this type of volatility we set up short-term, medium-term, and long-term buckets of money. Our recommendation is and continues to be: Unless your financial goals have changed, we don’t recommend changing the allocations of your investment accounts.
So be patient and stay the course.
You may have heard the saying, “don’t make decisions when you are emotional.” But how exactly do emotions influence our decisions and our cognitive thinking? In 1848, Phineas Gage, a construction foreman, was involved in an accident in which a 7-inch iron bar was driven through his skull. Gage survived, but the left frontal lobe of his brain was severely damaged and the effects on his behavior landed him in the medical books.
His personality changed entirely. He no longer seemed concerned for his future and struggled to make decisions. After closely studying Gage’s behavior, doctors concluded that Gage was emotionally “flat” due to the frontal lobe damage - the area of the brain where emotions originate. Based on Gage’s experience and further research, doctors concluded that emotions have an important influence on reasoning. The frontal lobes determine our personalities - problem solving, memory, emotions, language, initiation, etc. Essentially, our emotions are vital for decision-making.
When there is uncertainty, a part of our brain called the amygdala is triggered, and we are likely to react emotionally rather than analytically.
Today’s market is fraught with uncertainty, and there are more questions than answers. However, investors have experienced many such periods in recent times. The table below demonstrates that the market tends to correct itself after the risk has passed. It’s incredibly important to remain in the market during downturns because it’s nearly impossible to get back in at the right time. Much of the best performance in the market comes on the heels of declines. In fact, missing even just the 10 best days of the S&P 500 in 2020 would have provided a return of -33% instead of the market’s +18%!
Many times, we as advisors are asked what steps people should take to mitigate the loss in their portfolios, or if they should reallocate their assets to cash or gold or crypto or some other inflation hedge. Time in the market is crucial, and while there will be dips, bear markets, and recessions, historically the market continues to rise over time.
Pro Tip: What is important is time in the market. Not timing the market.
As financial planners, it would be unfair to say, “don’t make decisions when you are emotional.” The reality is that we all have emotions, and they are all valid. It is okay to have fear and voice your concerns. As planners, it is our duty to remind you of your values and goals, especially during these times of uncertainty.
This does not mean disregarding the market environment entirely, however. We take market dips, recessions, and unexpected events into account as we make recommendations. While we don’t know when or exactly why they happen, it’s important to acknowledge the impact they have on our clients’ ability to reach their goals.
The BPFP team believes in passive investing, meaning that we don’t try to time the market or pick the next hot stock. We believe that time in the market and globally diversified investing through low-cost index funds is the best way to reach your goals and accumulate long-term wealth.
First, we help clients assess their monthly living expenses and encourage having at least six times this amount in an easy-to-access account (checking or savings) before further investing. This provides a buffer in the event of unforeseen expenses or loss of income.
We then look at investing for medium-term and long-term goals. Medium-term investments (a 2-5 year time horizon) are usually comprised of a higher percentage of bond funds, while long-term investments (a 5+ year time horizon) tend to be heavily weighted with equity or stock funds. More equity means more risk and volatility which is correlated with higher returns over longer periods of time.
Everyone’s goals and dreams are different, so we work with each client to implement a savings and investment strategy that works for them. Generally speaking, getting started sooner is better!
Before making major decisions, we suggest asking the following questions:
What is the purpose of these funds?
What goal am I saving toward?
When do I need these funds?
If you’d like some help answering these questions, please reach out and schedule a call today.
Team Spotlight:
Delisha Horne
We are thrilled to welcome Delisha Horne as our newest team member. She is joining us as part of the BLX Internship Program. She joined the Ballast Point team in May 2022. Delisha is originally from Philadelphia, PA, but currently resides in Grand Prairie, TX.
Delisha enjoys spending quality time with family and friends. Delisha is always ready for a challenging adventure to test her might.
Delisha is looking forward to assisting BPFP clients and becoming a CFP® in the near future. You may see communications from her in the near future.
