Investment advice: 'Emotional cycle' will cost you money – Asheville Citizen-Times

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There’s an adage that your investments are like bars of soap: The more you handle them, the smaller they get.

Here in Asheville, the soap is likely to be handmade, with hemp seed oil, and scented with patchouli, rosemary or mint. But while Asheville will always have more artisanal soap to sell you when you run out, you probably can’t get back your hard-earned retirement savings once they’ve slipped way.

So why is it that overhandling your investments may make them smaller? Isn’t it true that the more closely you pay attention to your investments, the more money you’re potentially bound to make? Not necessarily.

We often don’t make good financial decisions when we’re experiencing strong emotions or stress. This is so well-known in finance it even has a name: the emotional cycle of investing.

When markets are going up, people get euphoric and they tend to buy more stocks and bonds. And when markets are going down, people get frightened and they tend to sell. This is classic “buying high” and “selling low” behavior that our rational minds know we shouldn’t do but we end up doing anyway. Lather, rinse and repeat.

When you opened your investment accounts, perhaps you were asked about your comfort level with risk and were asked to complete some sort of risk profile questionnaire. You dutifully filled it out, quite sure in your answers about the “risk” level you were taking on.

But then the markets started to drop, perhaps precipitously. And maybe you began to feel very differently about that “risk.” The risk questionnaire went right out the window as you exclaimed, “Do something!” and pulled your retirement savings out as cash.

Many people think they know when to get in and out of the market. But here are some sobering statistics. According to data from Bloomberg, if you were fully invested in large company U.S. stocks between 1997 and 2016 you achieved a compound annual return of 7.7 percent.

But your annual return dropped to only 4 percent if you missed just the 10 best days of stock returns out of 5,218 total trading days over that 20-year time period. Moreover, six of the best 10 days occurred within two weeks of the 10 worst days.

So moving money in and out of the market means that you have to make two correct decisions back-to-back, which is highly unlikely. As economist Michael Jensen once said: “Average investors who try to do a lot of trading will just make their brokers rich.”

Most people saving for their retirement are investors, not traders or speculators. Leave the short-term to the traders. You’re an investor. So as an investor how can you be a better guardian of your own retirement assets?

I shy away from the word “discipline” because it sounds like what you need to get yourself to the gym, or to floss your teeth regularly. Here, discipline means being aware of your emotional state and not letting your emotions drive your investment decisions. Discipline means developing a sound financial plan and sticking with it.

Discipline means staying focused on what you need your money to do for you, which is to see you through a comfortable retirement. Discipline means reminding yourself that small stock market pullbacks are normal. Discipline means being humble about your ability to successfully time the market.

My assumption here is that you are in well-diversified, low-cost and tax-efficient investments. For many of you, this is boring. It’s like generic soap you buy at the big box store: sensible but unsatisfying. Boring, however, is better than broke.

Long-term investors may be rewarded by putting their hard-earned retirement assets into the financial markets precisely because of market volatility, not in spite of it. The stock and bond markets are not a straight line up. If they were, there would be no risk and therefore no potential for return.

We can be our own worst enemies. What matters most is not what the markets do, which is out of your control, but disciplined management of your finite retirement assets.

Bray Creech, MBA, CPA is a financial advisor with Joel Adams & Associates with securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC, at 545 Merrimon Ave., Asheville. Contact him at 828-251-9700 or bray.creech@raymondjames.com. CPA services are not offered through Raymond James.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Bray Creech and not necessarily those of Raymond James. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Joel Adams & Associates is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc., member FINRA / SIPC. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

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