DOLLARS AND SEN$E: Managing Emotional Risk

BY CHRIS HANLY
Investment Consultant, Gary Goldberg Financial Services

Between the government shutdown and the upcoming debt ceiling deadline, there is plenty for investors to be nervous about. Without a doubt, there will be real world ramifications to the events that are transpiring as a result of Washington’s ineptitude. Sadly, many investors will let their emotions get the best of them and could succumb to the “heard” mentality and panic sell – which, historically, has been a costly mistake.

Markets rise and fall, and often, as the chart below illustrates, our elation with the market changes in a similar pattern. We all know the old saying “Buy Low and Sell High”, unfortunately, emotions often tell us to do the exact opposite – we feel most comfortable near the highs, and least comfortable near the lows.

To support this claim let’s take a moment and analyze annual market returns spanning the past three decades. Since 1980, the stock market, as measured by the S&P 500, has risen 25 out of 32 years – in spite of trading into negative territory in each of the 32 years depicted.

Nice information to have for market historians, but not particularly helpful until we overlay the investor sentiment line. At first glance, the chart illustrates the very simple point that when markets are up, we feel good about them and our investments. But keep looking and another very important idea will begin to emerge: The greatest opportunities for gains come at the points where we feel negative about the markets. Specifically, if you could get your courage up around the time you felt worst about the markets in 2009, investing in stocks offered the best overall upside. If you felt pretty badly about the state of affairs after the dotcom crash in 2000, that was the time to get back in. If you were a real clairvoyant, you felt the worst in 2002 when markets were off by some 25%, only to be rewarded the following year when markets returned about 26% for a spread of nearly 50 points. Even if you hit your emotional bottom a little early, say in 2001, you did pretty well in the rebound two years later.

As you grow more anxious over market volatility and wonder if you should simply go to cash, I encourage you to take a deep breath and seek advice. As a professional money management firm, we don’t just help investors find opportunities. Just as importantly, we help them overcome their own anxieties and help them avoid making irrational and counter-productive emotional decisions. I’m here to help, so don’t hesitate to call or email me with questions.

Christopher Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern and can be reached at (845) 368-2900 ext. 247 or [email protected].