Written by: Brian McKinney, CFP®
Would you be surprised to learn that the costliest investment mistakes are often made as a result of our emotions? You see, the reasons for markets going down are always different, but the emotions we have as investors are always the same. Fear, panic, and an inclination to protect against loss tend to take the lead when prices dip. There is little else that can worry us more than our money, so it’s only natural to feel this way. We begin asking questions like:
When will the declines stop?
Is there anything I can do to protect against loss?
How will this affect my near and long-term financial plans?
What happens for many of us is that these emotion-fueled questions propel us to cling onto the predictions of thought leaders. We listen with a keen ear in hopes they have the silver bullet that will accurately forecast what will happen to our investments. Because after all, it’s really the uncertainty that scares us. The fear of the unknown.
Be Wary of Financial Media Headlines Designed to Incite Emotion
The problem really isn’t the fact that we turn to the media to get market updates or investment analysis for guidance, it’s that the headlines we’re reading and the predictions we’re getting through these outlets aren’t objective. That is because they aren’t designed to be. What we’re given are opinions biased by the investment philosophies of the speaker and presented in such a way that they are explicitly designed to grab our attention. These outlets and analysts play on our vulnerable emotions in order to gain viewers, followers, likes, subscribes and other engagements that will increase their ratings.
It's no surprise then that these headlines serve as market drawdown accelerants, which we saw with the subprime housing lending situation prior to The Great Recession, the Chinese trade war over the past few years, and the Covid market crash in March of 2020. Could it happen again with Monkeypox? Or mid-term elections? Quite possibly. Only time will tell.
Besides, Forecasters are Usually Wrong
What’s more is that forecasters are typically wrong. Just take the future oil barrel price predictions as a prime example. Will the price per barrel in 2023 be $45 or $380? JP Morgan and Citigroup have wildly different outlooks on what will happen in the upcoming year. Will prices reach historical highs or plummet? And whose prediction do you choose? With analysts’ guesses skewed so deeply across the board, is it really safe to be choosing sides?
Keep Your Eyes (and Ears) OFF the Headlines and On Your Long-Term Goals
Sure, it’s important to stay abreast of market movements and economic conditions; but, it’s also important not to allow media forecasts to sway your investment decisions—especially in times of economic duress when we are more emotional and susceptible to making rash decisions. Not just because your emotions can cloud your judgement, but because you take a gamble putting the fate of your portfolio in the hands of some media pundit or bank or analyst who knows nothing about you, your individualized circumstances, or your personalized financial plan.
Preparation Beats Prediction Every Time
A veteran advisor at a conference once told me a line I’ll never forget and which I share with clients often: “With successful investing, it is far more useful to prepare than to predict." You see, prediction relies on the predictor’s ability to guess the future correctly, while preparation is more about setting reasonable expectations about different outcomes.
Here’s an example using recent market conditions where equities have seen huge selloffs.
Prediction-based advice: “Get out of stocks completely to eliminate market risk and go all-in on more conservative bonds.”
Preparation-based advice: “It’s impossible to guess the timing of market movements, let alone guess at what the right amount of cash to hold is. Stick with a diversified mix of bonds and non-correlating investments to reduce downturns in the stock market.”
Investing has a lot more to do with setting up reasonable expectations about (1) the market, (2) what could happen based on evidence and historical data, and (3) the best strategies to employ to help you reach your goals. General forecasting, news, and predictions of economic and market conditions should never sway your individual financial decisions; and more importantly, you should not allow them to divert you from your financial plan.
At Williams Asset Management, our clients cherish that they can rely on us to walk them through these emotional times. When fear and panic set in, we are here to explain and clarify the preparatory moves we’re making in their portfolios and how we are always looking to set them up for success in any market environment.
Whether you are currently working with an advisor or are looking for a trusted ally with whom you can build and protect your financial plan, the advisors at Williams Asset Management are here to help guide you. Simply Contact Us to learn more about your opportunities.