Investing with Your Emotions.
In this first of a 3-part series, we sat down with Kyle Dana, AGFinancial’ Senior Vice President, Retirement and Investments, to hear his insights and answers to questions regarding investing.
Q: Kyle, when is the best time to get into the market?
A: The market has now entered its eighth year as a bull market (a confident market for which an indicator is rising share prices), the second longest bull market in history. Since the Great Recession of 2008 and 2009, the S&P 500 has increased nearly 250%. This steep incline of growth has lulled many into what could prove to be a false sense of security.
Investors are human, which means that they are emotional and constantly changing. They tend to sell when the market is low because of the emotional response to seeing losses reflected on their statements or reported bad news in the media. Similarly, investors often want to move their money back in after the market has had a significant increase.
I read once that the stock market is the most unusual market in the world, because when everything is on sale, no one wants to buy. An analogy of this mentality is buying your clothes only when the prices are raised and returning them after they go on clearance—for the lower sale price.
Selling at market lows can devastate your portfolio’s performance. At the same time, buying at higher prices can be equally devastating. A successful investor once said, “Be fearful when others are greedy and be greedy when others are fearful.” This is just another way of stating the old adage, “Buy low, sell high.”
Q: Based on what you just said, how much of a role do emotions play in investing?
A: In general, emotions are a major driver of our daily decisions. The same is true when people make investment decisions. The more investors can understand that, and balance emotion with logical decision making, the more successful they will be.
In this bull market, I often hear people say that they feel like they’re missing out by not investing more heavily in the market. It’s important to realize that it’s that feeling of missing out that drives people to change their portfolio to something more aggressive than their normal risk tolerance level would allow. That’s illustrated by the fact that when the market goes down, they immediately bail. That unfortunate behavior means they were invested in something too aggressive for their comfort level. An investment with the potential to earn 10-15% most likely also has the potential to lose the same or greater.
A perfect example is a person that I recently spoke to who was seeking higher returns. During our phone call, he informed me that in late 2008 he had moved out of the market at lows. In doing this, he locked in a significant loss.
Now he was asking the question, “When is the appropriate time for me to move back into the market?” My response was simple…I am not a market timer, however, my personal experience has been that the best time to get in is when you feel least comfortable getting in.
I told him that past behavior is a strong indicator of future behavior, so if he got in at highs and bailed at lows before, it sounds like he was on the path to repeat again. But this time he is 10 years older and closer to retirement.
FINAL THOUGHT: Consider how close you are to retirement. Be extra careful when thinking about reallocating your investments.
If you’re an AG 403(b) investor, familiarize yourself with the investment options available within the plan. From the MBA Income Fund to the multiple stock strategies, there are investment options within the plan for all risk tolerance levels.
Click here to read Part 2 of this series, Focusing on Timing Instead of Time.
This information is not legal, financial, or tax advice. Information is from sources deemed reliable. Information is subject to error, omission, withdrawal, or change. Contact your own legal, financial, or tax advisor before taking any action.