When was the last time you watched the evening news and turned to your wife or husband and said, “I really feel great about America”? If you’re anything like me, it rarely happens. The reality is that the media is in the business of advertising. The more viewers they have, the more they can charge companies to advertise. And what gets better ratings than dramatic, sensational headlines designed to elicit strong emotions? It’s not that all news is bad. It’s just that we are conditioned to remember the really bad news and simply overlook the good news.
As investors, this can create a problem. The short-term overreaction to something you read or hear can have devastating effects on your investment portfolio. The overload of information can cause anxiety for investors and lead them to mistakes. By understanding the reality, you can find solutions to stay on track and maintain long-term perspective.
The News is Giving Me Investment Anxiety!
In today’s world of 24-hour cable news, social media, internet, print newspapers, radio, etc., it is nearly impossible to avoid hearing about events, accurate or not. By any measure, we consume more information than ever before and we like it. Information is important, and the more information you have, the better choices you can make for you and your family. However, we must remember the pattern of news repeats over time.
With financial news, it’s even more pronounced. If you search Google for the word “economy,” over 705 million results pop up. Type “stock market” and you will get over 102 million results. When economic conditions slow, even the most logical person will have some anxiety and start researching new ideas. The problem is that anxious investors tend to search out negative data, and when they don’t understand what it means it creates even more anxiety leading to mistakes. This confusion fuels more pessimism, and if the market is falling, they will want to reduce risk without taking into account their long-term goals.
Don’t Hit the Panic Button!
Mark Twain once said, “History does not repeat itself, but it rhymes.” This statement couldn’t be more true when we talk about the history of economics and financial markets. The reality is that as human beings, our emotions are difficult to control. Especially when it comes to money and investing. When things are going well, we want to buy more stocks. When things fall, we panic and sell. In general, these short-term reactions can have devastating results and are a big reason why individual investors tend to underperform. (For related reading, see: Financial Markets: When Fear and Greed Take Over.)
Let’s take a look at what’s happened in just the last 10 years. We have experienced a lot of bad things including Wall Street bailouts, a BP oil spill, S&P lowering the credit rating of the U.S., Detroit filing bankruptcy, a U.S. government shutdown, Brexit, etc. As a result, over $1 trillion was taken out of equity mutual funds from January 31, 2007 through December 31, 2016. And what did the market do? The S&P 500 Index rose 287% from March 9, 2009 to December 31, 2016. The recession in 2008 was difficult for all of us, but if you panicked and sold everything you most likely didn’t participate in the rally that followed.
Looking back even further, we’ve had seven bear markets since 1973, about one every five years, with an average decline of 32%. When we get a bear market, the news becomes very depressing. Investors feel the urge to panic and “play it safe.” By the time they re-enter the market, it can be too late and they may have missed much of the recovery.
The fear of losing can be a significant emotion. Todd Feldman, assistant finance professor at San Francisco State University, states that “loss-averse investors are investors more impacted by losses than gains. For example, when loss-averse investors experience losses, they may sell as the stock market is plummeting. When the stock market starts to rebound, it takes the loss-averse investor a long time to re-enter the market after experiencing significant losses.”
We’ve had bull markets and bear markets. Recessions come and go. Since 1926 (the Great Depression), the S&P 500 Index has had 67 positive years out of 91. Of the negative years, only six had losses greater than 20%. The S&P 500 Index had an average annual return of 10.04% over this 91-year history. The periods of crisis can cause investors to lose sight of their long-term goals and make emotional decisions detrimental to those goals. (For related reading, see: Riding the Bear Into a Bull Market.)
What Can You Do to Avoid Emotional Investing?
Maintain perspective and ignore the noise. Easier said than done, right? I realize the investment world is complicated with all the asset classes and sectors in both equities and fixed income. Plus, asset classes come in and out of favor depending on macroeconomic conditions. How can we expect the average person to digest all this information, create a portfolio, and manage through the risk? The answer, we can’t. According to DALBAR, over the 30-year period that ended December 31, 2015, the average equity investor had a return of 3.66% compared to the S&P 500 Index which had 10.35%.
Individual investors don’t have to do things alone. There are many qualified investment advisors they can turn to for help and guidance. Your financial advisor will help you set goals, establish an investment plan and guide you through different economic and market cycles.
The advisor you work with can help create a plan tailored to your specific needs. A comprehensive plan to identify your time horizon, specific dollars needed to meet specific financial goals, realistic rate-of-return expectations, income distributions during retirement, estate planning considerations and a host of other items. Starting with a plan can help put things in perspective so you don’t panic when we have another recession.
(For more from this author, see: Investing Basics: What You Need to Know.)