“I no longer watch CNBC with my coffee every morning. I find that I just don’t want to be more confused and feel more anxious. I just don’t feel as optimistic as I used to–my whole mood has changed. I guess I’m feeling a sense of heaviness, uncertainty-maybe even a bit of depression.”
“My statement has sat in my unopened emails for weeks. I don’t want to look at or know the balance. I own a lot of shares of each stock and it’s great when the market is going up because there are big gains. But when it’s going down, I have to face large losses.”
I had these conversations last week with two knowledgeable and confident investors who are generally quite comfortable with volatility. Both of their “Entrepreneur” Moneymax® Profiles suggest that they are both highly motivated by performance with tendencies to take higher but calculated risks.
Often Bull markets are like blinders. Investors begin to believe in the fantasy that their stocks will always take good care of them and never disappoint them.
Since the “Great Recession”, the market has reinforced such fantasies. It has been a bull market for the past five years with one small exception in 2011 with a 10% pull back. Recently we have had the worst three days in three years.
In my years of experience, as a psychologist specializing in the psychodynamics of money management and investing, I’ve come to realize that there are certain important relationships which we must understand before we can achieve a consistent degree of success in the world of investing and in the marketplace.
• The first and foremost of these is that the majority of losses in the marketplace result not from poor trading decisions but rather from emotional and attitudinal causes.
• Investing by its very nature is an emotional business. Few investors have the self-knowledge, emotional stamina or self-control to make rational, intelligent and profitable decisions, particularly in times of stress.
So, often investors react wildly to bad news, often selling shares of perfectly good stocks. Had they held on, they would have realized that. But they, as many investors, react with their emotional money minds rather than their rational ones. They usually are at the “effect” of their feelings and not managing them well.
Why is it that some investors make rational decisions, stick with their choices and strategies while others act out their emotions and make bad investment decisions?
The field of Behavioral Finance has given insight into the mental miscues investors make that sabotage and crimp their returns:
• Fear of losing money
Psychologically, people give greater weight to a past loss than they do to a future gain. In fact, some investors find losing money so distasteful that they psych themselves out of investing altogether.
Investors don’t make reasonable trade-offs. The drive to avoid loss really sabotages any future gains or opportunities.
Solution: Determine ahead of time exactly how much money your clients can “emotionally” afford to lose as well as “financially”. They are often very different.
• Worrying about the wrong risks
Investors are held captive by unpredictable yet frightening events. People are traumatized by dramatic events. They can’t tolerate this anxiety.
Investors become blind and deaf to others’ advice in these times and tune out that advice, including their advisors’. They exaggerate current crises. What’s worse is that they forget the wisdom of lessons from the past. They overlook the fact that people who stayed fully invested during previous volatile times recouped their losses.
Solution: Help your clients base their decisions on what they can control, not on those they can’t control. Give them the rationale for their current strategy and
reiterate why it still makes sense. Repeat it several times and intermittently so they can hear it and use it as a guideline in regulating their knee-jerk and emotional reactions.
In other words, there is a vast world of emotion under the surface structure of investing. To know and understand the motivating forces behind investing, to know and understand why one investor becomes tense about losses, why one becomes greedy about profits, and why one either overreacts or fails to react is, perhaps, more than half the investment battle won. There is a high price to pay for the kind of innocence many investors bring to their investments and the way they interact with their investment advisors. Unfortunately, in many cases, to help your clients continue to maximize their financial returns, you must first help them master their emotions.