Emotions and the market

With the high volatility in the stock market over the past year, emotions have been running at an all-time high for many investors. Staying on track has become harder than ever.

Although the overall stock market has recovered some of its lost ground this spring, many people are still very spooked by stocks. Unfortunately, that trepidation can lead to decisions that investors may later regret.

Long-term investors have two basic jobs: managing their investments and managing their emotions. You can hire somebody to manage your money — and we think you should. But only you can manage your emotions.

This is important because if emotions get out of control, they can undercut even the best money-management practices.

Straight talk about the economy

I’m no economist, but I’ll give you a few of my observations.

Investors who become obsessed with watching the news about all the problems in our economy can easily become angry and anxious.

We are still in the midst of great financial turmoil. Every crisis can feel worse than the last one. Over the past 80 years our nation has gone through a couple of stock market crashes, a major depression and half a dozen serious bear markets. We’ve survived the 1973 Arab oil crisis, a couple of major domestic political crises, the end of the dot-com technology bubble and numerous wars.

To me, this seems to be a necessary purging process that our society must endure again and again in order to re-stabilize. Unfortunately, each crisis can seem to contain the ingredients for the end of life as we know it. These fears can lead us to over-react, just as a bull market can lead us to think we will soon be wealthier than we ever dreamed.

Just as fish live in the sea and are limited by its boundaries, we live within an economic climate that we cannot escape.

Managing our finances

Some people believe the market and the economy are now on the rebound. Even if that turns out to be correct, the substantial losses of 2007 and 2008 are likely to have long-term effects for many people.

Over the past several months some clients have asked me if the recent declines in their portfolios will delay their retirement. Others who are already retired have asked if they will need to return to work.

The answers of course are different in each case. But in reality, many people may have to postpone retirement or reduce their expectations – or both. And some retirees may need to return to part-time work in order to maintain their lifestyles. These are the cold, hard realities of life.

What we do about these facts can have profound long-term consequences. That’s why I believe that this is an excellent time to consult with your financial advisor to determine what actions, if any, you should take.

Ultimately, I do not believe in giving in to our fears because tomorrow is always a new day.

Managing our emotions

Tough times can require decisions that are difficult, upsetting and unpleasant. The question is: How can we find peace in such troubling times?  For the answers, I don’t have to look any farther than my clients.

When I compare the people I regard as my most successful clients with those who are least successful, one of the biggest differences I see is the ways they focus their attention and energy.

Successful investors tend to focus not so much on today as on a string of tomorrows. In the shorter term, the market is unpredictable and subject to great volatility. But in the very long term, the stock market has had a strong upward bias for a couple of hundred years. I don’t know any reason to think that will change.

This is a key point that’s easily overlooked as investors frantically search for a guru with “right” answers that they hope will bring instant gratification.

Despair vs. facts

Anybody who is inclined to accept gloomy theories and rumors will always find them. You don’t have to look beyond the professional analysts on television and radio, not to mention your neighbors, relatives and friends.

One of the best ways to resist this sea of negativity is to remember the most important facts. Here are three:

• First, nobody can control the stock market nor accurately predict its short-term movements.

• Second, even the most reasonable opinions and predictions are only that — opinions.

• Third, the news media have a huge vested interest in sensationalizing whatever is negative and scandalous. Scare tactics and evocative language can fan the flames of fear while they keep you watching, listening and reading. To put it bluntly, the financial interests of the media are much better served if you are worried than if you are calmly reassured.

How smart investors manage their emotions

Some of my clients have taught me by example how to get through tumultuous times.

One couple told me they don’t allow negative news to control how they feel. The husband put it this way: “I don’t worry about the markets and the bad news, Aaron. That’s what I’m paying you to do for me.” That’s fair enough, and I’m happy to be a surrogate worrywart for him. He and his wife made the conscious choice to focus their time and attention on things that are most important to them, such as their grandchildren and close friends.

Some clients have told me they feel better by just changing channels. I’ve done the same thing, and I’ve recommended to some people that they watch the History Channel instead of CNBC’s non-stop financial commentary. In my view, the former is likely to be much more educational than the latter.

Some clients go farther and turn off the TV altogether. One woman told me that when she starts feeling stressed, she gets out of her chair and goes for a walk. She said that can work wonders for her mind, her body and her spirits.

These are common-sense responses that you’ve probably heard before. But often old advice is good advice, and I think this is one of those times.

What we control and what we don’t

Here’s something another client said to me: “Aaron, I think I have done a reasonably good job of controlling what I can control and making good decisions. The things that I can’t control have been less unkind to me lately than they were last fall and winter. I’m still doing my best to keep doing the right things and adding to my investments. That’s the best I can do right now.”

Neither you nor I nor the president nor the smartest-sounding television analyst can control the stock market. Like the weather, the market is going to do what it’s going to do. Whether they are dealing with the weather or the market, sane people learn to accept that sometimes it will do what we want and other times it will do the opposite.

While we can’t control inflation, political decisions or the market, at least to some extent we can control our habits, our actions, our expectations and our attitudes.

The better you do these things, the better your chances of being a successful investor.

My advice

As far as I can tell, you are much more likely to succeed if you hire a good financial advisor to help you make smart decisions both for the short term and the long term.

When I work with clients, I help them set realistic goals and do the things that are most likely to help them attain those goals. Just as important, I help them avoid making short-term decisions (such as exiting the market entirely or rushing into commodities) that are likely to have long-term negative consequences.

Personally I believe that brighter days are ahead and that someday most of us will look back on the past two years as a very painful period that we managed to get through. Getting to that future won’t be easy. But it will be a lot easier for people who can keep their heads when others seem to be losing theirs.