FREE NEWSLETTER
IT’S BEEN A TUMULTUOUS year for diversified investors. Usually, when stocks are down, bonds are up. Not this year. The U.S. stock and bond markets have both suffered double-digit losses. That includes the Treasury bond market, widely considered to be a secure and low-risk place to invest.
A widely accepted measure of risk is a portfolio’s stock-to-bond ratio. More in stocks usually means more risk. But in 2022, whatever an investor’s stock-to-bond mix, investment results have likely been painful. Seeing our portfolio decrease in value affects everyone differently. But the most common reaction that I see in investors, especially retirees, is fear.
Imagine you’re on a hike through the rain forest. You hear some movement in the brush behind you. You spin around and come face to face with a 600-pound tiger with glowing neon eyes. What does it feel like? First, your heart drops into your stomach like a boulder. Next, you feel heat rush to your face as you begin to sweat. By now, you’ve comprehended you’re in danger. It’s time to act. You could run. You could climb a tree. You could try to fight. Or you could just sit there and do nothing. But who would do that?
Now, imagine a very different scenario. You’re recently retired. You have worked long and hard to get to your golden years, and they’re finally here. But in your first year as a retiree, you open your investment statement and see an ocean of red numbers. Your stomach drops. You feel the fear of running out of money. You feel the dread of possibly going back to work. You feel fear. Now, it’s time to act. You could sell everything and run. You could try to make back the losses quickly with a risky, new strategy. Or you could just sit there and do nothing. But who would do that?
This experience of fear is one we all know. The first time we had to speak in front of a class of our peers. Fear of judgment. The first time we talked to a young crush. Fear of rejection. The first time we experience significant investment losses. Fear of uncertainty.
Our brains are built so that fear triggers that visceral response we’ve all heard about: fight or flight. Our brains are very good at making a quick calculation about what to do in the face of danger. But with investments, it can be even worse. It’s like the hungry tiger is sitting above our head, following us everywhere we go, reminding us to be afraid. Afraid of who the president will be. Afraid of what foreign dictators will do. Afraid of what higher interest rates mean. Afraid of inflation.
This is why investing is so difficult. Many financial planners, myself included, encourage investors to pick an investment mix and then stick with it through thick and thin. This is the best way to survive the fear of uncertainty. When times grow fear-inducing, we often suggest sitting there and doing nothing—the “stay the course” cliché. But it’s a cliché for a reason. It’s worked for millions of investors.
Whenever we make a decision with long-term implications, such as a change to our portfolio, we need to think critically about it. I once heard it said that the time devoted to every decision should be proportional to that decision’s impact on our life. What’s for dinner? Quick decision. Should I sell my long-term investments because of short-term world issues? Slow decision.
Fight or flight is a system that our brain uses to make quick emotional decisions that spur action. I say, save it for the tiger. Instead, take your time with any investment decision, thinking long and hard before making any changes.
Luke Smith is a CFP® professional and practicing financial planner. He creates customized financial plans for each family he works with around the country. Luke pursued financial planning to combine his two favorite passions: finance and people. He spends his free time with his wife Heather and their family in Maryland. Outside of work, Luke enjoys the outdoors, golf, reading and writing. You can reach him at Luke.Smith@Wealthspire.com. Check out Luke’s earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Back when I was a little more of a maverick with my investments, I implemented my “Charlie Munger rule” to help keep my feet on the ground. Munger has said words to the effect that the critical element of his investing approach is to avoid doing anything stupid (rather than trying to be smart or clever). I didn’t really trust myself to avoid stupid, so I thought about it in terms of magnitude with respect to my portfolio. I set a monthly limit: no transactions (individual or in total) that impacted more than 10% of my portfolio. That gave me time to decide if what I was doing really made sense, and moderated any impact from any decision I later regretted.
Nice article. I think it resonates with me as I’m fairly risk adverse at this point in my life. In that vein, I’d suggest a complimentary thought to your theme is that if someone does start to make “big changes” it’s sometimes best done in small steps over time in case they’re wrong. Said another way, it’s sometimes best to stick a toe in rather than jump in with both feet (especially if the consequences of being wrong are severe).