The Roles Fear and Greed Play in Investing

The media is great when it comes to reporting the everyday happenings in the world around us, even when it comes to keeping up with market returns. However, when it comes to reporting on financial matters, they can sometimes inadvertently scare folks away from working with a financial advisor. Over the last couple of weeks I took on two new clients, one of whom we interviewed a year ago, who decided to go with a stockbroker prior to coming to us. One had negative growth on a large seven-figure account. In that same period of time, the equity markets showed a 7% return. So this decision to work with someone who prefers to time the market turned out to be a costly mistake for my new client.

Timing the Market

Unfortunately, that type of story really isn’t uncommon. Many clients come in with this media-hyped mentality of trusting the flashy, fast-talking, big credentialed brokers that will offer them the better return. In reality, that just isn’t the case. CXO Advisory Group, a research company in Virginia, collected 6,582 forecasts from 68 different financial experts from 2005 to 2012 and found they nailed it about 47% of the time. Doesn’t that make you feel confident? (For related reading, see: Market Timing Fails as a Money Maker.)

A recent report stated that 58% of people are sitting on cash right now instead of collecting on the market returns that are out there. That’s a lot of cash to lose, especially when you realize that the Dow Jones recently went over 20,000. So why aren’t people jumping on board when it comes to investing? Obviously, there’s a myriad of reasons. They may believe the market is going to take a dive because they’ve listened to the doom and gloom reports on the news, or maybe an “expert” has burned them before. Whatever the reason, they cost themselves money they could’ve made. (For related reading, see: You're Crazy Not to Invest in the Stock Market.)

The Fear of Investing

In Napoleon Hill’s book, "Think and Grow Rich," one of the things he talks about is fear, especially the fear we have of poverty when it comes to our money; a fear of extreme loss keeps people from using the market to their advantage. So we are basically looking at two extremes when it comes to investing, extreme greed and extreme fear, both of which will cost you money. The first individual could have seen better returns if they’d just invested in a well-blended portfolio as opposed to trying to time the market. The other individual lost money because their fear kept them from investing in the market and they missed out on historical returns. 

As a certified financial planner, trading the market on a day-to-day platform just doesn’t make sense in the long run. You’ll see better returns over the long haul if you leave it alone and let compound interest do its job. A portfolio should be well-balanced and blended using broad-based low-cost ETFs (exchange traded funds) or index funds. You can also use some specific sectors based on trends, along with broad market indexes, tactically rebalanced and allocated to give you market returns on the upside, all while minimizing the downside risk exposure. These are the types of actions a true wealth planner, who isn’t trying to time the market, takes.

(For more from this author, see: 25 Investing Statistics You Need to Know.)

 

Heritage Investor, 11470 Parkside Dr Suite 201, Knoxville, TN 37934, (865) 690-1155, (865) 690-1155, is an independent firm with securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group, Inc., a Registered Investment Advisor.