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The Emotional Investor

Would you buy a sweater at $100 today when it was only $50 last week? When I see a stock that’s up 40 percent over the past two days, and I get phone calls asking, “Do you think we should buy it?” I want to know the deep-rooted meaning behind the question, so I always ask, “Why do you want to buy?” 

By nature, I believe human beings in general are emotionally programmed to be bad investors. We tend to want to do the wrong thing at the wrong time, like wanting to buy a stock that is a lot more expensive today than it was two days ago. As I see it, when emotions get the best of you, you are not thinking with your mind; you are thinking based on the emotion you are feeling at the time. You let external forces influence you and it affected your decision-making.  It’s actually not just prevalent in investing…it’s seen in everyday life.

So, I remind our clients: “The reason you are invested and allocated the way you are is all part of a longer-term, well-thought-out, agreed-upon plan not dictated by what goes on in the market day to day. If you worry about what goes on in the market day to day, and make decisions based on the market day to day, that’s gambling, not investing.” 

Fear and Greed Drive the Market

“Be fearful when others are greedy and greedy when others are fearful,” Warren Buffet said, while in the midst of buying up depressed stocks from the fallout of the subprime mortgage crisis. Buffett knew that if the masses are going in one direction, you probably don’t want to follow suit. Timing the market may appear easy, but remember, you don’t have to be right once – you have to be right twice. 

For example, if you tell me you want to sell today, do you really know if it is the right time? So, let’s say you are right. Tomorrow comes along and we have a big correction. When are you going to get back in? 

Let’s say someone else’s guess is right and they sell. If the market is 15 percent lower next week than it is today, will that investor be more likely or less likely to get back in while still fearful of it going down? People who take advantage of those types of corrections are the ones that buy when it goes down and not trying to time when the bottom is. Furthermore, remember this: time IN the market is much more important than tim-ING the market.

The More Education You Get the Less You Worry

In my opinion, one of the most effective ways of investing, while in the accumulation phase, is by continuing to invest throughout the year, adding weekly, bi-weekly, or monthly contributions to your account regardless of how the market is doing. Obviously, this strategy would be different if we are paying ourselves from our own retirement accounts and (the income or distribution phases of investing). 

Many people approaching retirement are concerned about the many all-time highs achieved in the market, and who have diligently put money away all along, saw their account balances significantly rise higher than they did 20 years ago despite all the declines. Why? When there are market corrections, dollar cost averaging (consistent and disciplined investing) is working harder in your favor. In fact, during your accumulation years you should be saying, “I want those corrections!” because you can buy more shares for the same amount of money you have been putting in all along. 

Account Balances Down? We Planned for It   

Perception is reality when it comes to market declines. This awful Coronavirus, for example, has greatly affected thousands of individuals and their families. Of course, widespread fear caused the markets to react negatively. When events like this occur, stock values are directly affected. Buyers then scoop up stocks at discounted prices. 

Our incoming calls, though occur…occur at a fairly low rate when the market is down because we regularly reach out to our clients reminding them that this will happen.  Mostly, we remind them that volatility – whether upward or downward – and whatever the cause, are also part of long-term investing. We tell them: “Your account balances are down. It’s OK. We’ve talked about this before and now is the time to buy, not sell like everyone else.”  Or, “This is why we are sitting in enough cash to cover your income needs so we aren’t forced to sell into losses.”

Because we are a planning firm, we can go back to conversations we’ve had six months, a year, or many years ago regarding the actual plan we put together. 

We can do all the planning, but clients must also have trust in how the market works, trust in their advisor, and trust in the process. If we don’t do a good job of mapping things out, it’s our fault not theirs. Letting external forces affect our clients’ decision-making is also letting those same forces affect their planning. We support our clients by assisting them in staying disciplined to the process.

I never had the opportunity to meet Mr. Tillotson, but I’ve heard stories of him saying, “If you’re upset because your account balance is down, the market’s down, and you want to throw a brick through my window, just make sure you tie a check to it.” There is certainly some humor injected into that statement, but it reinforces the point Mr. Buffet has made. At Hefren-Tillotson, we do financial planning and investing but always in that order.  If you go back to your long-term plan, you won’t have to be concerned with short-term volatility.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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