Emotions and Anti-Bacterial Soap: How They Both Cost You Money

Around the beginning of March, I started getting nervous about Coronavirus.  At that time, it seemed like it was still not quite “real” here in Philadelphia with most of the known cases still in Washington state.  

I had no way of envisioning what has actually happened, but I made a few trips to the grocery store for some food that would hold us over “for a while,” whatever that means.  On one such trip, I couldn’t believe my good fortune to find a couple of bottles of anti-bacterial soap on an otherwise fairly empty shelf.  

It seemed too good to be true.  I thought my anti-bacterial addition would add a little extra oomph to my battle against the Coronavirus.  In short, I made an emotional decision, never stopping to really think that anti-bacterial products only work against bacterial infections and aren’t effective against viruses.  

Duh me.  I let my fear get the best of me when I could have just gone with the regular store-brand soap for less money.  

Unfortunately, emotional decisions are even costlier when it comes to your investments.  

Roller Coaster

I have a confession to make.  I don’t like roller coasters.  Never have, and don’t see that changing as I get older.  I love the speed, the loopty loops, and even being upside down, but the drops.  They ruin it for me.  Not sure what it is, but I don’t like it.  So for the most part, I just don’t go on roller coasters.  

Which is kind of like investing.  When we invest, we know there will be ups and downs.  Intellectually, I think most people grasp that.  Just like before I get on the roller coaster, I know what I’m getting into, even if I can’t see it.  But that’s about where the similarities end.  I can live a very full life without ever getting on another roller coaster.  But if you want to reach your goals, you’re going to have to invest your money to make it grow.  And that growth is, at some point, going to come with some ups and downs.    

The ups and downs of the market can be thought of like a roller coaster, but so can the investor experience and the emotions they go through as markets rise and fall.  As we see below, investors often experience different emotions at different points in a given market.  

Source: Capital Group

Humans get caught up in reacting to what the market is doing, and that’s really where the trouble begins.  Because again, we know declines will happen.  For the most part, as long as we don’t make any rash sell decisions, the losses should only be temporary.  

We should be most excited about investing at the exact moment when our emotions are screaming at us that the world is ending and to seek shelter.  Which of course, is the absolute worst thing we can do because it is so hard (impossible) to know when markets will recover, and by the time things “settle down,” we will have already missed some or all of the recovery.  Instead, we should acknowledge our emotions, remind ourself why we’re investing and over what time horizon, and ride it out.    

But that’s not what most investors do.  How do we know that?  Fortunately, we track how much money all investors are putting into, or pulling out of, mutual funds and Exchange Traded Funds (ETF’s).  

Crack The Whip

Turns out, humans have a lot of room to improve when it comes to being disciplined investors and avoiding market timing.  In this chart below, you’ll see the last eleven-plus years of the S&P’s performance (purple).  

You’ll also see what investors were doing with their money during that same time period (blue bars).  The parts of the bar chart above 0 represent additions to equity markets, or when investors were adding money by buying stocks.  The bars below 0 represent redemptions, or when they were taking risk off the table by selling stocks.  Buying vs. selling.  

You’ll notice that people tend to buy when the market (2017-2019, with a few exceptions) is going up, and sell when the market is going down.  The complete opposite of “buy low and sell high.”

To make matters worse, their timing is unbelievably bad.  Just after most of the declines, selling continues (2009-2013) until the market has recovered to a point where the market’s approaching another sell-off.  By trying to time the market, investors are playing a very cruel game of crack the whip with their money.  

Some of this is understandable.  You’d have to be a robot to see your account value go down and not wonder if you should try to “stop the bleeding.”  

But this is one of the strongest advantages of working with a fee-only financial planner.  To help you avoid buying anti-bacterial soap for your viral pandemics, and to help you make investment decisions that are objective and not emotional, and to take advantage of the down-markets by tax-loss harvesting, Roth IRA conversions, etc.  

The markets had their worst first-quarter ever as of a month ago.  The market looks very different today.  Book your free call to learn more about how I can help you manage your money more successfully.  There are a lot of opportunities for you to take advantage of if your income is stable and you’re working from home, and there are ways I can help you navigate the government relief options from the CARES Act.  Let me know how I can help you!

Stay safe and anti-viral!

Brendan