Emotions can be a good thing. There are positive emotions like love, joy, surprise, excitement, amusement, and gratitude. Emotions can also be a bad thing. Negative emotions include fear, panic, anxiety, anger, sorrow, greed, and hate. We would obviously prefer to experience positive emotions, but sometimes life’s circumstances get in the way and we face the negative ones far too often.
When it comes to money, it’s best to leave your emotions out of the mix. You should note that I said that it is “best” not to mix money and emotions. I didn’t say it was easy. Money is a very emotional issue. It is possible to have positive emotions about money. You can feel surprise and joy when you get an unexpected bonus at work, or you can feel gratitude or thankfulness when you think about your life compared to others. However, most of the emotions that surround the topic of money are negative. You might experience anxiety about your job status; fear that you won’t have enough money to meet your long-term goals; or even panic when your investment portfolio takes a sudden and unexpected hit.
In the first two months of this year, we’ve seen investors experience a wide range of emotions, and they are all negative. Many of us have experienced the emotion of greed as we’ve watched the financial markets rise steadily over the last several years. We might have wished that we had a more aggressive allocation in our portfolio because those darn bonds were just holding us back from those big gains in stocks. And that cash we’ve been sitting on certainly hasn’t been earning us anything for years!
I learned a new term as I listened to the financial pundits try to explain what was driving the markets higher recently. It was FOMO or the "fear of missing out." It’s just another, less negative way of describing greed. For those of us old enough to remember, we saw it in the stock market during the dot-com era at the turn of the century, we saw it in the real estate markets in 2005, and we've seen it recently in the cryptocurrency markets. When you are investing because you are afraid of missing out on the big gains going on around you, it usually doesn't end well.
After a year like 2017, when it seemed like the stock markets only knew one direction, it didn’t take long for us to be reminded that what goes up, can also go down. In 2018 we have already experienced more volatility in the markets that we did in all of 2017. And with the sudden return of volatility, we’ve also seen an increase in the emotions that can wreak havoc on a long-term financial plan.
We need to keep that volatility in perspective. When the Dow Jones Industrial Average (the Dow) is at 25,000, a 300-point move is only a little over 1%. It’s never been unusual for stock markets to move up or down by 1% in a day. So, while the number looks big, and the media will do everything they can to make it sound big, it’s not that big of a change.
Here’s what normally happens to individual investors: They see the big gains that are going on in the markets and they want in, so they buy; then, when the markets go through a quick and seemingly severe drop, fear kicks in and they sell. Buying high and selling low is not how to make money in the investing world.
We need to accept the fact that we are going to be emotional about our money. We can’t avoid it. Once we know that we can’t avoid the emotions that surround money, we need to learn how to control them. How do we do that? We put a plan in place. Your plan will be different from everyone else’s because you have your own individual goals and circumstances. Your plan should consider your tolerance and capacity for risk, your investment time horizon, and your liquidity or cash flow needs.
But putting a plan in place is only helpful if you have the discipline to stick to it. When the markets are hitting record highs, you must ignore the noise and stick to your plan. And when it seems like the markets are in free fall, you have to ignore those pundits and the headlines and stick to your plan. In fact, if your portfolio is properly diversified, and you rebalance your holdings when market moves affect your allocations, you will be forced to buy low and sell high. And that is how you win at the investment game.