Managing the Cycle of Emotion

My real point in this post is to remind people about the cycle of emotion.  There’s an explanation for why the equities market return 7-8% historically over a 30-year period, and why the average do-it-yourself investor makes 2% at best.  It’s called buying and selling on the cycle of emotion.  Instead of buying low and selling high, most investors do the opposite.  A neighbor mentions an investment, and the potential investor does nothing until the price has increase and his or her confidence has increased.  By the time they have the guts to invest, the price is even higher.  Invariably, the investment rises and then loses value and the investor sells at a loss in a moment of panic or despair.  The discouraged investor swears s/he will never do that again.  Until, of course, the neighbor mentions the next big thing.

You can manage the cycle of emotion through systematic implementation of a financial plan that is in alignment with your investment goals, philosophies, and risk tolerance.  The trick is to stick to it and to make thoughtful adjustments as the markets make their adjustments.

My favorite comment I’ve heard lately is that the “flight to gold at these prices is a flight to Armageddon.” Still makes me laugh.  Let’s face it, if you’re wanting to buy gold because you’re concerned about the global geopolitical system and currencies collapsing, you might be better off with land.  At least then you might get food and water because you can’t eat gold.  I’m not convinced that market fundamentals justify gold’s price.  Fear seems to have a bigger influence in that market.  Gold is not a good inflation hedge, and it’s in danger of losing value very quickly when the economy recovers.  Don’t get caught in the frenzy.  Fear is not the best place from which to make decisions.  Look at your financial plan.  Follow it.

Take a long-term look if you must make short-term gasps

First of all, my clients are not driven by the day-to-day, what’s-going-on-in-with-the-market-now investors.  They’re not stock price chasers.  They’re not betting on the next big thing.  Or, if they are, they are doing it on their own in the context of the larger plan that we’ve built for them.  So, it’s not necessary for me to blog or twitter or comment on what’s going on in the market(s).

Second of all, information is widely available from many various contradictory sources of varying reliability.  Remember, predictions and explanations are often the result of crystal ball work, and your crystal ball is as good as anyone else’s.  I don’t need to add to the insanity.  That brings me to my last point….

The markets are going to do what the markets are going to do.  The only thing you can control is your relationship to it—whether to participate in it, how much and with what philosophical bent.  If you feel good about your overall plan and your relationship to the markets, then anytime you see “bad” news, you can say to yourself, “My plan anticipates this market volatility happening, and I know that I’ve set up my investing to accommodate that volatility with the level of risk I’m willing to take.  Nothing to worry about.”  Then go spend time with your family or doing things that bring you happiness.

What are your options?

     The stock market is not inherently a bad place to be.  Like every investment, it has a risk-reward trade-off.  You must decide how much risk you’re willing to take.  In the last several years, many people have re-evaluated for themselves what that means.  First things first:  figure out what kind of investor you are.

     Then, consider other options besides the stock market if you can.  If the better part of your savings is in your 401k at your employer, you’re most likely stuck with those investment options.  But if you have cash on the sidelines or you have IRA monies from previous employers, you have more options.  People think of the stock market because it’s what most publicized and most accessible online.  However, there are other pretty interesting and pretty great options in the insurance and real estate worlds where your returns might be greater and your risk perhaps lower.  You might consider these other opportunities.