Managing emotions is key to investment success
By John Sammut
Investing is not meant to be comfortable. Ironically, it’s the uncomfortable and lonely decisions that often prove to be most successful in the long run. Two powerful human emotions, fear and greed, cause people to invest with a “rear-view mirror” strategy that is often detrimental to long term financial success. In a deep desire to feel emotionally comfortable, the investor masses corner themselves into a narrow category that many seem to believe is the “holy grail” of financial success going forward. The asset class of choice is almost always exclusively what has worked well in the recent past.
History has shown that chasing returns is a sure recipe for mediocre long-term performance at best, and perhaps devastating financial consequences at worst. Remember the new economy era? In 1999, TMT (Technology, Media, and Telecom) stocks were the “only” place to be – until the dot-com collapse a short time after. Punished by magnificent declines in their stock holdings and tempted by historically low interest rates, money then poured into real estate, which the “experts” seemed to believe would go up in perpetuity. The public jumped in with both feet, with very little money down, only to learn the hard way that real estate prices can indeed fall back to earth. Gravity always trumps greed in the long run!
Recently, with interest rates at multi-decade lows (and bond prices at stratospheric highs) money has poured into fixed income assets at an astounding pace. Many investors believe that corporate, municipal, and U.S. Treasury Bonds will continue to provide safe and steady returns with very little capital risk, primarily because bonds have done so well in the midst of the stock market and real estate collapse. The bond bull market, which began on September 21, 1981 when long term interest rates were north of 15 percent, is getting rather “long in the tooth”. History suggests that today’s bond investor may be in for a seriously unpleasant surprise when long-term interest rates reverse course.
Behavioral finance and the cycle of human emotions demonstrate that as investments grow in value, investor confidence rises. These feelings of optimism lead to euphoria after returns have been most favorable. This is often the point of maximum portfolio risk. Conversely, as investments lose value, confidence diminishes, and feelings of denial, fear and even desperation take hold. There is a feeling of utter despondency when returns have been most unfavorable. This is often the point of maximum potential opportunity.
In the investment world, perhaps nothing is more difficult to learn than the fact that the price of a security is lowest when most people are selling and at its peak when most are buying. Understand our emotions, and we are well on our way to investment success. When you feel like selling, it may actually be a great time to grit your teeth and buy … if you feel like buying, perhaps it’s time to take a cold shower and sell!
John Sammut, a Financial Advisor with RBC Wealth Management, helps individual investors, families and corporations organize their financial affairs so they make better decisions, improve results, and enjoy a peaceful state of mind. You can reach Sammut by telephone at (315) 423-1425, by e-mail at john.sammut@rbc.com or visit him on the web at www.johnmsammut.com
The opinions expressed in this report are those of the author and are not necessarily the same as those of RBC Wealth Management or its research department. RBC Wealth Management did not assist in the preparation of this report and makes no guarantee as to its accuracy or the reliability of the sources used for its preparation. This information should not be construed as a research report, as it is not sufficient enough to be used as the primary basis for investment decisions. Past performance is no guarantee of future results.RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC