Chart of the Month: The Critical Element in Investing and Winning: Controlling Emotions
Written by Kelly S. Olson Pedersen, CFP®, CDFA
Here’s a little experiment. Look at the graph below of S&P returns since 1926 and answer this question: Are you a long-term investor that can weather the downturns and approach them as re-balancing opportunities?
It’s probably REALLY EASY to nod and say, YES!
It’s easy because the entire picture and perspective is there. The dips aren’t ‘felt’ and the ‘fear’ isn’t part of the analysis. It’s just clear, in hindsight, that if you are able to make a long-term plan and stick to it, everything will be awesome, right?
But then a bear market happens, you may feel afraid because it’s very real and can be scary. When we ask people, “How long did it feel like the market was spiraling out of control during the 2007 Great Recession?” We typically get an answer somewhere between 2-3 years. In reality, it was 17 months. However, it FELT twice as long to many people because it was so painful.
If you review the top 10 bear markets we’ve ever experienced, you’ll see that the average length is only 17 months. That means if you can make a plan that can get you through 17 months (okay perhaps 24 months for good measure), you WILL be able to weather the storm.
Without a plan, mistakes are made because emotions take over rational behavior. This is where the average investor without an advisor tends to lag in total returns. It may not seem this way over the last few years because we haven’t had many of those negative years to keep things in perspective. In a typical year, we should always have at least one dip around 14% and a couple of dips around the 5% rate. We didn’t have EITHER in 2017 and people started to feel complacent. Maybe even smart. Those who are smart and those who are just lucky will be weeded out in the years to come. This is because the smart people who understand the need to take profits off the table when you’ve earned them and buy into assets that aren’t faring as well, will be the take-all winners in the end. Those who don’t, will feel the feast and then the famine. Emotional decisions will likely be made that may make the outcome even worse. In order to win, one needs to keep emotions and ego in check. Be ok with the ‘average’ returns and miss the downturns that creates intense fear. You’ll sleep better at night if you have a plan to do just that.
CAISSA can help you with that plan and keep emotions in check. Click here to learn more about our strategy to help, called “Tranches of Income.”