Emotions and Investing | AWM Insights #120

Recessions, high inflation, or all-time market highs are usually the only times investment news makes its way into mainstream media. Financial news is really incentivized to instill fear or greed and is only entertainment at the end of the day. Ignoring this noise is paramount to a better investing experience and zooming out to the big picture can help keep market adversity in proper perspective. 

 

Emotions, or the behavioral side of investing, costs the average investor over 3% a year when it comes to growing wealth.  No one can completely ignore the pain of losing money or the animal spirits when the markets are doing well. Staying objective, sticking to your plan, and avoiding emotional mistakes are must-haves if you want to grow wealth efficiently. A good advisor prepares you before market adversity hits and then communicates in a way you can understand through markets like we have now. 

 

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EPISODE HIGHLIGHTS:

(0:47) How should you deal with the market gimmicks of the media and the news cycle?(1:15) What are the human elements of investing and our portfolios?(1:35) The technical side of investing is what most people think is the most important part of investing. The emotional, pyschological, or behavioral side is arguagly more important.(2:10) Withstanding the behavioral challenges of investing over your lifetime will determine whether you have a good or bad investing experience. (2:39) The emotional side of investing must be taken into account, not just the financial science and math.(3:00) “Be fearful when others are greedy and greedy when others are fearful.” This famous quote by Warren Buffett is his advice on the emotions of investing.   (3:26) It’s very easy to put money into investments when things are going really well.(3:50) Nobody likes losing money and panic costs many investors dearly. An advisor that is objective and nudges you to invest for your long-term goals even during stressful markets and coaches you to stick to your plan adds tremendous value and a better investing experience.(4:15) The financial media industry is built to encourage trading, overly focus on the short term, and certainly have no incentive to help you to achieve your individual priorities.(5:35) It is normal to have the psychological response to down markets. It is also the job of the advisor to look for risks in very good up markets. (6:09) Objective advice and answering questions with the data and the science and according to your long-term goals is what affords a better investing experience where you only focus on the big picture.(7:10) The news outlet are encouraging you to do something and most of the time that is not in your best interest. (7:30) Ask the question of the motives behind TV, social media, or newspapers that want to scare you and then offer their answer of what you should do. It is usually transactional with a benefit to themselves.(7:45) Confirmation bias and where you get your news from is important to always be aware of. Ask yourself, what if I’m wrong on this take? What does the data and facts dictate. Trying to remain impartial is a skill in itself. (9:00) What happens when the Federal Reserve raises rates?(9:10) How long will inflation stay high?(9:30) We don’t make decisions based on predicting the near term future. This would be emotional decisions and not aligned with your long term plan. (9:55) Your plan and portfolio should already be ready for events like we have today. You should be ready and prepared for adversity. (10:50) Decisions should be made to achieve priorities and goals in life. Updates to the plan are constant and ongoing but shouldn’t be made emotionally. Thoughtful advice that maximizes your chances of long-term success will always improve your odds to live the life you want to live.(12:00) Average equity investors underperform by -3% over 30 years. This is the cost of the emotions and the behavioral component of investing. This is panicking and selling when you shouldn’t and includes the expenses of trading. It doesn’t even account for the tax bills when you liquidate a portfolio.(13:03) The cost of underperforming over 30 years when you start with $100,000 is a difference of $1.2 million. You could end up with $2 million if you stay the course and stick to the plan. But the average investor couldn’t do that in the study so ended up with $789,000. (14:00) This doesn’t mean you should stick your head in the sand but take information in context. Rely on the priorities that drive your plan and be aware of people encouraging you to be constantly buying and selling. (14:50) March of 2020 was a perfect microcosm of staying the course and tuning out the noise. So many people panicked and were selling fear in the media. The people that stuck to their plan and listened to the objective advice were rewarded.(15:40) It doesn’t mean you shouldn’t ask questions but focusing on the what has worked in the past and not making emotional decisions has led to amazing results.