Stripping the emotions out

Subscribing to my site guarantees you don't miss any new content. Choose either E-Mail Feed or RSS Feed. Thanks for visiting!

You can never strip the emotions out of investing. Nor would you want to, emotions are what makes us human.

I always want to know how my clients are feeling, I don’t want a bunch of robots that are tough to read. BUT with that said, sometimes, you’d wish that client’s didn’t have such emotional overreactions.

Part of a planner’s job is to know your clients tolerance for risk. Part of a planners job is to reassure clients when things start to get rough, when the investing ocean gets a bit choppy.

Part of a planners job is to meet with the client periodically to go over the plan and reinforce the process and what we’re trying to accomplish. Part of a planner’s job is to know your client’s temperament and teach your clients how to manage their emotions better.

Like I said in my previous post, the financial plan helps put things in perspective for client’s, it helps steel their reactions to shorter term market volatility and focus on the longer term outlook, but like Depeche Mode said ‘People are People’ and people have strong emotions and can get rattled.

A sense of history - stock market volatility

Although past (historic) market performance is not a predictor of future market performance, it does give you an idea what returns you can expect from a specific asset class (i.e. small cap value stocks or US Govt. Treasury bonds).

Also, using history as a reference, you can see what the biggest yearly swings (volatility) in performance for those asset classes has been. So before you construct an investment portfolio, both you and the client should have a good idea what kind of behavior to expect from your investments:

• The more aggressively you invest, the more volatility you are going to expose yourself to
• the lesser the market volatility, the better equipped you are to handle the ride
• the better the ride, the more likely you are to be successful

Its why most everyone in the investment business, including financial advisors, investment commentators, fund managers etc. all tell you, ‘you have to invest for the long-term.’ What they are really trying to do is save you from yourself, from getting caught up in the short term emotions the markets can evoke, from making bad decisions.

Now I include myself in the above group and firmly believe the individual investor has to look to the long-term; and to look towards your advisor and financial plan, as resources, to help you weather the turbulent short(er) term volatility.

Different viewpoints

But I also want you to know I’m not looking to tow the company line here. There are investment commentators and professional traders that believe holding for the long term is what Wall Street has conditioned investors to believe, so as to keep the assets invested, where constant revenues are generated.

And there’s some truth to that. If you, the investor, stay invested here’s who makes money: Wall Street makes money, the Wall Street firm(s), the mutual fund(s), the mutual fund manager, financial advisors, the members of a company’s board, the bond traders, the company shareholders, etc.

There’s nothing wrong with that because in the end what trumps everything is what’s right for the client and I believe staying invested is whats best for the client. Mind you, staying invested entails structured asset re-balancing, solid diversification (including lowly correlated alternative investments) etc.

At this point, y’all know there is always going to be market ups and downs and if you want good returns, then you have to weather some storms. At the same time, if I told you of an account where you worry far less about the markets ups and downs, do you think that’s something you might be interested in?

Good News

There is a type of account where people tend to invest there money and forget about it. Hmmm…

Where is the environment right for investments to grow w/o much client concern and possible interference? Drum roll please…

Tags: Featured, Psychology Behind Financial Planning