Taking emotions out of investing
Brian Kilb: Steve, I think it’s a fascinating time to be in the business. We’ve had over 900 days without a significant correction of 10% or more, and yet investors seem pretty wary. They’re hearing a lot of news in the paper that potentially there may be a correction. We have geopolitical conflicts throughout the Middle East, Ukraine, whatnot. Lots to be worried about, and yet so much success over the last three years.
Steve Giles: Brian, bull markets are born in pessimism. They rise in skepticism. They mature on optimism. And they eventually die in euphoria.
And I don’t get the sense that we’re at that euphoric state yet. Right now, I still sense that there is some pessimism out there in the economy. I think there’s pessimism in investors and as individuals that react to how we feel emotionally. I just don’t get the sense that we’re at the point of euphoria, where a bull market’s going to die.
Brian: Markets are driven, as you know, by fear and greed, right? You and I have seen it many times over the years. When prices go up, people typically buy more. When prices go down, people sell.
Steve: Investors tend to buy when the markets are high, and they tend to sell when the markets are low, and the reason is because of their emotions. Their emotions get in their way.
The farther down markets go, the more pessimistic they become. The farther up markets go, the more optimistic they become, which of course will drive their investor decisions.
Brian: You know, I think we can help them by moving their investment decisions from irrational subjective behavior to more rational objective behavior, for them to realize that oftentimes what everybody else is doing is not in their best interest. And those cues that we might have – in terms of valuations, rebalancing tools, all those things that we use to help investors make rational decisions – will oftentimes be in opposition with what the rest of the investment community is doing.
Steve: That’s absolutely correct, Brian. You, as an investor, want to try to do the opposite of what everyone else is doing. When the market experiences that point of maximum pessimism, that’s the time you want to be a buyer.
A well-balanced portfolio is going to help smooth those rides out along the time. You want to make the troughs less severe. You want to make the peaks less severe so that you don’t get whipsawed as you go up and down through those market cycles. It puts the investor in a position where they feel less inclined to be reactive to their emotions and, instead, trusting the portfolio for the balance – the way it’s designed to work.
Brian: And I think if people take the time to prepare for a correction, when that day comes, if you know you’ve done your homework on the beginning, turn off the TV, quit reading the newspaper, quit reacting to the emotion of the day and allow the storm to pass. And you’ll be in better shape when you get out.
Brian Kilb is executive vice president and chief operating officer of Landaas & Company.
Steve Giles is a vice president and investment advisor at Landaas & Company.
Money Talk Video by Peter May
(initially posted July 28, 2014)