We came across the article below written by AthenaInvest titled “The Wall of Worry”. This is a good read about emotions as it relates to investing and your portfolio.
#1 in the “What Can We Do” section states: “The key to ignoring the constant chatter and media hype is to have a disciplined approach that keeps your emotions in check.”
This is where I believe our models come into play. Utilizing rule-based and disciplined portfolio construction, we feel confident in investing to pursue long- term goals while seeking to insulate (or defend) against some of the downside. This helps you stay properly diversified and strives towards a smoother ride with less volatility.
As you will see in the article, over the last eight years there have been many headlines (which I call noise) creating panic and fear. These often result in a “flock to safety” or “loss aversion” mentality in which investors panic sell and go to cash. By making these emotional decisions, you can see that jumping in-and-out of the market based on the latest noise is detrimental to your portfolio and long-term goals.
We hope that this article will provide valuable insight as to why we believe a diversified approach and taking the emotion out of your investing is the right approach.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The S&P 500 is an unmanaged index and may not be invested into directly.
The Wall of Worry
Written on 31 May 2017. Posted in Behavioral Advisor
The last eight years have been a good period for equity investing. But can it last? As the old saying goes, “Markets climb a wall of worry.” There is certainly plenty to worry about: looming market corrections, elections in Europe, and political uncertainty.
In reviewing the last eight years, we find plenty of dramatic world events that could have caused an abrupt end to the bull market. Looking at the chart below, anyone could be forgiven for wanting to get out of the market at many points. However, doing so would have resulted in forgoing significant returns.
S&P 500 TOTAL RETURN INDEX WITH SELECTED HEADLINES (January 1, 2009 – April 30, 2017)
Source: S&P Dow Jones Indices LLC
When markets are positive for an extended period, investors begin to wonder how long it will last. They constantly fret about whether some event is going to turn into a market rout and agonize over whether they should stay invested or head for the sidelines.
Of course, pundits and commentators fuel the fire by issuing warnings about everything that could possibly go wrong with the world, the economy, markets and high-profile stocks. Meanwhile, economists and experts give conflicting predictions from the same data. Altogether, these potentially unsettling world events are amplified by opinion and media hype.
But for all the resulting sound and fury, usually the right thing to do is to stay fully invested. It’s not that these events are not real or don’t matter, it’s just that reacting to them should not be the basis for long-term investment decisions. History has also shown that the US economy and stock market are incredibly resilient with the capacity to weather them. While pullbacks are inevitable, the best course of action is to stay focused on fundamentals and your long-term goals.
From the Behavioral Viewpoint
What is going on?
- Events and the constant chatter about them create a negative availability bias, in which a never-ending stream of dramatic events have the potential to dramatically change everything. While this is good for cable ratings and social media clicks, it creates anxiety for investors.
- Pundits and media opinion trigger our social validation and herding instincts. Where we are on the lookout for something dangerous and should be prepared to flee. While useful on the Serengeti, this is not particularly helpful in making sound investment decisions.
- Any discussion about potential negative performance can trigger loss aversion, in which we feel twice as bad about a loss as we do a comparable gain. This fear is powerful and can cause investors to make poor decisions that are counterproductive to their long-term goals.
- We overestimate our abilities to determine both the best time to exit and to get back into the market. On the other hand, we underestimate the true randomness of world events. This overconfidence bias results in emotional selling and missing out on subsequent returns.
What can we do?
- The key to ignoring the constant chatter and media hype is to have a disciplined approach that keeps your emotions in check. Of Course, turning off the media and going outside also helps.
- Use needs based planning to separate short and long-term investments. This can insulate your emotions from short-term market volatility while allowing long-term investments the time they need to mature.
- An experienced financial advisor, who has lived through many market environments, can also provide valuable perspective and coaching that can help you stick to the plan and stay focused on long-term goals.
IMPORTANT INFORMATION AND DISCLOSURES
The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.
You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives financial circumstances. You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation. Investments involve risk and unless otherwise stated, are not guaranteed. Past Performance is no guarantee of future results.
The opinions expressed in this material do not necessarily reflect the views of LPL Financial. Behavioral Advisor and AthenaInvest are not affiliated with LPL Financial.