This article was published on the Orange Times on August 9, 2018.
The stock market has taken a time out from the historic upward drive that commenced with elections in late 2016, so it’s a good time to pause and reflect. Today’s topic for reflection is the role of emotions in investing.
The old-time wisdom of Wall Street is to warn investors to guard against allowing either of two very different emotions to guide your financial decisions – fear and greed.
You can see greed at work when markets are gaining value day by day and investors who have been sitting on the sidelines jump in. They don’t want to miss out on market gains, which is understandable. A prime example was the late 1990s “dot-com” boom, as jubilant investors piled on as internet stocks soared. When the bubble burst in mid-2000, a lot of people were left holding empty bags.
The problem is that once the market has risen substantially it’s usually too late to join the party, since a correction or even a bear market often follows a round of gains. Then you see fear take hold, as stock values drop and investors pull their money out to avoid taking losses. One of the worst examples of this behavior came in 2009, after the subprime mortgage scandal led to the Great Recession. Fear drove many people out of the market that year, but they missed out on the rally that followed, with market values recovering to previous levels by early 2012. And those who had jumped in toward the end of the late 2000s boom, driven first by greed, likely suffered the worst losses.
Fear and greed lead people to buy high and sell low, a complete failure to heed another piece of market wisdom, “buy low and sell high.”
Investors who keep calm and use logic in investment planning take the opposite approach: When markets are rising they sell winners and rebalance their portfolio. When markets are falling they look for likely bottoms and “buy on the dip.”
Easier said than done? Perhaps, but financial planners recommend a strategy designed to keep emotions out of your investing decisions. First you must cultivate a long-term outlook and accept market volatility as a fact of life. The equities markets have generally offered positive returns over the long term, but to benefit you have to stay in the market through up and down cycles.
Markets respond to a variety of factors, from economic conditions and corporate earnings to geopolitical events and technology trends. Trying to anticipate when these interrelated factors will influence the market to rise or fall is futile. So the second step is to devise a sensible investment plan based on portfolio diversification and tax sensitive rebalancing, and then follow the plan, without succumbing to the dictates of fear and greed.
Eric Tashlein is a Certified Financial Planner professional™ and founding Principal of Connecticut Capital Management Group, LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., A Registered Investment Advisor. Cambridge Investment Research Inc., and Connecticut Capital Management Group, LLC are not affiliated.