By Allen Ostrofe

This article was originally published in The Union. Download the PDF

This week, like many weeks, had no shortage of fear-packed headlines. Add political issues like immigration, tweets, tariff wars, currency manipulation, and general white-collar crime. It is tempting enough to drive any investor’s head into the sand in exasperation. Why even try?

Susan and Larry, dependent upon their investments for retirement income, called from their gated community in San Jose, California. They asked, “With the recent amount of volatility, shouldn’t we dramatically change our strategy, move to only bonds, or leave the stock markets entirely?”

As a professional, do we address this as an investment or emotional question, or both? Can we even separate the two?

For some clients, an advisor doubles as a therapist. Take Masters degrees in Business, Economics, Financial Planning or Investment Management, add a keen academic focus on the impact of emotions, throw in years of experience, and you have behavioral finance.

Yes, headlines have become more brutal recently. Media competition for your attention is cutthroat. How can our emotional reaction have a positive or negative impact on performance? Consider the following:

Last year’s U.S. stock markets had the least amount of volatility over 15 years. (Source - Preeti Varathan, 12.22.17)
It appears that year-to-date “volatility” in other classes, such as Bonds, Real Estate, Currencies, Oil & Gas, is below their long-term volatility as well. (Source – Ibbotson, 7.12.18)
Ibbotson reports that the average mutual fund investor has significantly lagged the 5/10/15 year average performances of funds. Some analysts believe these losses were tied to bad, short-term, emotional buys and sells. Source - Blackstone 10.3.17)
Many analysts argue that political events or elections have little to no lasting effect on the stock markets. So, while a few bumps might have given the impression of market turbulence, some historical context shows there is room for volatility to increase further, not just for stocks, but most asset classes. (Source – Elizabeth Nichols, September, 2017)
What is less reported is that our economy is growing at a decent 3-4%; not rosy, but enough to keep us away from a recession. Investor and consumer confidence are near all-time highs. Unemployment is down. Profits (necessary to add jobs and upgrade equipment) are up. Ultimately, stock prices will reflect the actual underlying performance of the company. Market corrections (like we saw in February 2018) come about every year-and-a-half. The prudent investor does not emotionally react, nor does nothing. Your advisor should be periodically suggesting small tactical changes in investments or investment classes to help mitigate the full thrust of future markets’ corrections. (Source – Wall Street Journal, 7.27.18)

Remember, you are an important part of this professional partnership. Susan and Larry considered this and noted some things where they could better contain their emotions:

Have frequent money discussions with your family/friends. Keep these discussions drama-free.
Reflect on the consequences of how you personally digest financial news in volatile times.
When you think about your money, identify concerns, needs or feelings that get in your way.
Remember that first responses can be very emotional instead of cognitive and logical.
Realize that emotional reactions to sudden market declines are normal. Focus on long-term results.
Understanding your own “panic triggers” helps you make smarter decisions.
Involve your kids in the purchase/sale of an auto or home. Explaining the process helps keep it rational.
Follow through on sound advice. An “adherence strategy” helps you avoid later emotional waffling.
Be honest with yourself; ask yourself what can cause you to self-destruct on your investment and money goals.

Susan and Larry may now better understand how to harness their emotions. Stick to the strategy, while making smaller tactical changes. Being a good partner with your advisor may lead to a more profitable result. How about you?

The opinions voiced in this material are for general information only and are not intended to provide specific legal advice or recommendations for any individual. Please consult your legal advisor regarding your specific situation.

This is a hypothetical situation based on real life examples. Names and circumstances have been changed. Investing involves risk including loss of principal.

Allen Ostrofe, MBA, CFP®, is president of Ostrofe Financial Consultants, Inc., with clients in 31 states and is a registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial. For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.