Ride the Cycle of Investor Emotions to Long-Term Financial Success
“How are you?”
I bet I’m not the only one who’s stumbled over that question recently when I’m talking on the phone, video chatting, or answering emails. It’s rarely been so tough to answer such a simple question!
I’m OK in the sense that my family and my Keen Wealth team are all healthy and continue social distancing. I’m OK in the sense that we have enough food, enough toilet paper, and enough on demand entertainment.
But, like everyone else, I’m not necessarily OK in the sense that I’m concerned about the ongoing health of my family, my clients, my neighbors here in Kansas City, and the health care professionals on the front lines. I feel for the millions of people who are struggling with diminished income and job losses. I miss seeing friends and family face-to-face, eating in my favorite restaurants, going to a movie with my wife. And while I’m optimistic that we may be glimpsing some light at the end of the tunnel, I know reopening the country will be small solace to those who have lost loved ones to COVID-19.
In addition to the stress caused by the pandemic, we’ve had some volatility in the financial markets that have made headlines over the past couple months. In just eight weeks, we’ve gone from a record high in the stock market, to a drop of over 30% in the S&P 500 index, then to a strong market rally that has recouped more than half of that 30% + decline. If you are tied to the TV watching the markets daily, it can be enough to make your head spin!
Managing emotion is always a complicated discipline for investors. Right now, acknowledging how you’re feeling and how that’s affecting your market outlook is helpful to charting your best course forward. Let’s take a look at how the cycle of investor emotions works.
1. Optimism → Excitement → Euphoria
It might be hard right now to remember that initial burst of positivity you felt when you began your financial journey. For many of you reading this, you started saving early in your career and then you joined Keen Wealth as you neared the retirement phase of life. And during the record-breaking, 11-year bull run we experienced from March 2009 to February 2020, you may have felt euphoric as you sped towards realizing your retirement financial goals.
However, the peak of euphoria is also the peak of emotional danger for an investor. The better you’re feeling about your money, the more you may be willing to overspend or take unnecessary risks. That’s as true for a young investor about to sign a mortgage that might stretch his finances too much as it is for a new retiree who’s treating his required minimum distributions like a windfall.
And then, something happens. A large company misses its earnings forecast. A new technology disrupts existing businesses. A hurricane swells. The business cycle falters.
Or a global pandemic shuts down businesses across the world. Suddenly, the markets drop into correction or bear market territory. And investors’ emotional trajectories shift accordingly.
2. Anxiety → Fear → Panic
At the early stages of this part of the cycle of investor emotions, your feelings are alerting you that you need to adapt your behavior. For example, anxiety about spreading COVID-19 is what’s leading you to plan ahead before you go to the grocery store, make a shopping list that will feed your family for the whole week, and put on a cloth face covering. Likewise, financial anxiety might lead you to cut back on unnecessary expenses and increase your savings.
However, this pandemic presents so much uncertainty that it can be easy for anxiety to build into real fear, especially from a financial perspective. Social distancing and lots of hand washing might be keeping your family safe. But it doesn’t reduce the volatility in the markets.
Worse, none of us has lived through a social shutdown of this magnitude before. Things we haven’t experienced are often the most frightening. That’s when real panic can set in. We become hypersensitive to every bad headline, every falling number. In a panicked state, the feeling that we have to do something – right now – to ward off the perceived threat can make it very difficult to make levelheaded decisions.
At the bottom of the cycle of investor emotions is where the real danger lies.
Shuttered businesses, rising unemployment, and dropping stocks can make us feel like we’re not really in control of our money. It’s here that many despondent investors decide investing just isn’t worth it. They become angry and impatient. And if they aren’t working with a fiduciary advisor, they risk making snap decisions that could damage their long-term financial planning in irrevocable ways.
Ironically, many folks who are feeling down about down markets don’t realize that their emotional low point could be the high point of market opportunity. They often just need a professional, outside perspective to help them see beyond this one difficult moment and appreciate how markets can help build wealth in the long run.
4. Relief → Optimism
I truly believe that when clients are feeling the most uncertain about their finances, that’s when my team at Keen Wealth is at its best. Because we plan for clients’ whole lives, not just one rough patch, we’re able to help folks work through short-term challenges without losing sight of their long-term goals. Turning that corner, watching the markets regain momentum, and experiencing that sense of relief is what leads folks back to feeling in-control of their finances, their lives, and their futures.
COVID-19 is a new social experience for all of us. But my team has worked through unexpected moments of significant volatility before. If you feel yourself getting whipped around the cycle of investor emotions, let’s schedule a phone call or video chat. Let us know how you’re feeling and we’ll discuss some potential tweaks to your financial plan that could improve your outlook.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.
The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.
The Amazon Best Seller ranking listed on marketing materials is specifically referring to Best Seller rankings for the Kindle Top 100 Paid Lists under the subcategories of: Budgeting and Financial Risk Management, based on data as of September 5, 2019. Amazon rankings although relevant on how a product is selling overall doesn’t necessarily indicate how well an item is selling among other similar items or similar item categories. Amazon may choose the most popular categories or subcategories within which an item has a high ranking to determine its best seller rankings. These rankings are updated hourly and as a result, should be expected to fluctuate as such. Keen Wealth Advisors and Amazon are not affiliated entities.
The Steve Sanduski Advisor Network, Belay Advisor, LLC and other third-party contributors to our blogs and podcasts are not affiliated with Keen Wealth Advisors.
For additional details on Keen Wealth Advisors, please visit https://www.keenwealthadvisors.com/important-disclosures.