By J. Russell Williamson –
In March of 2013, Joseph Engelberg and Christopher A. Parsons published a paper that linked worrying about the Stock Market and increased risk of hospital admissions. This study was done over a 30 year period. They found that if the stock market fell by at least 1.5% on a given day, there was an average increase of .26% in hospital admissions over the next two days. When limiting the results to just psychological conditions, such as anxiety or panic attacks; that number almost doubled. In fact, when the US markets fell by almost 25% on “Black Monday” Oct. 19th, 1987, hospital admissions spiked by 5%. Their conclusion was that the daily fluctuation in stock prices has an almost immediate impact on the physical health of investors.
One of the reasons that investors stress about their investments is because the pain of loss can be much stronger than the satisfaction of a potential gain. Studies have actually shown that golfers tend to choose an extra stroke to play around a water hazard, rather than taking the perceived “risk” of hitting over it. When it comes to financial transactions, this fear of loss may cost us quite a bit.
We are, after all, human and that means that psychological and behavioral variables will impact our investment behavior. We follow emotions, biases, and assumptions when it comes to financial decisions. Our thinking is often blinded by what is most recent, most relevant, and most dramatic. Few events have been more dramatic than the 2008 financial crisis; of which many investors have not fully recovered. There were tremendous outflows from equity mutual funds from 2008 – 2012 ($548 Billion, according to the Investment Company Institute). However, we must ask ourselves if selling off these funds was the wisest decision, or was there a possible disconnect between perception and reality.
Franklin Templeton surveyed 1000 Americans each year from 2010 – 2013 and asked them how the stock market finished at the end of the previous year. The results were telling; 66% said the market was down or flat in 2009, 49% said down for 2010, 70% said down for 2011, and 31% agreed for 2012. The reality is that the market was actually up 14.9% on average per year for that period. Even today, many will comment on the weak economy, but fail to realize that the market actually finished up 32.4% at the end of 2013. Is this aversion to loss causing the individual investor to miss opportunity? Is this rollercoaster of emotions causing stress and health problems?
Individual investors like to go with the flow; we all feel safer in crowds and tend to believe the consensus view is correct. Unfortunately, when it comes to investing, the herd mentality can significantly impact our results. To properly see the forest (market realities) through the trees (our emotions), the assistance of a financial adviser is worth looking at. They have the ability to avoid getting emotional about the daily swings of the market. An adviser can alleviate the vast majority of stress that an investor can struggle with. By keeping a clear perspective of the fundamentals, they can allow you to live your life freely knowing that your money and future is in good hands.
Herd behavior causes many investors to pull out of the market at the exact wrong time; their emotions take over and they miss out on its best days. The S&P 500 has averaged 9.41% annually over the past 20 years according to Morningstar, but the typical equity investor realized less than half of that return. Why? Because they tend to invest heavily at the top and sell when the market is at its bottom. During the last twenty years; if you were not invested during the S&P’s ten best days during the average year, your return would have only been 5.5%; and it would fall to 3.03% if you missed the 20 best days during the average year. Now, how many of its best days during the average year would you have to miss in order for you to lose money instead of gaining 9.41%? Forty! That’s right, if you rode that emotional ride and didn’t follow a steady hand to guide you through the highs and lows; you would have actually lost money.
So what should an investor do in light of this never ending market volatility? How can they avoid the stresses that are sure to follow? First of all, tune out the noise and gain a long-term perspective. With today’s 24 hour news cycle, it is too easy to get caught up in the “crisis du jour”. Meet with an investment advisor to put together a stable plan. It is important to find one that you are comfortable with; avoid the sales pitch of easy money. If you want to keep your stress down and your returns high, seek out a professional who shares your values and has a steady hand.
Keep a balanced perspective and you will be able to provide security for your future and a legacy for generations to come.
J. Russell Williamson of Platinum Planning, Inc. has been advising clients for two decades. He has experienced the ups and downs of the Stock Market and offers reassuring and stable advice. If you have any questions regarding your assets and security, you can contact Russ at (941) 444-5260. He is located in Sarasota at 2477 Stickney Point Road, Ste 219B; or you can learn more about him by clicking on www.platinumplanninginc.com.