Managing Investor Emotions and Behavioral Responses

Over the previous two decades, there have been a number of research studies that have explored the human behavioral response patterns when confronted with painful, or pleasurable stimulus. It’s interesting that across a number of these studies, it was concluded that humans will be, in some cases, ten times more likely to avoid pain than to gravitate toward pleasure. One researcher suggested that the human brain reacts much more strongly to stimuli that is deemed to be harmful or negative.

Another research study into successful marriages seemed to confirm and expound upon this by suggesting that happily married couples must have seven positive interactions for every one negative interaction, in order to maintain balance. The suggestion being, that the one negative interaction carries so much more emotional weight than positive interactions, it takes seven positives to balance out one negative. Understanding that in general, the human brain is much more sensitive to pain than pleasure can be of tremendous benefit when helping clients manage the emotional aspects of investing.

We are surrounded by instantly available information, from our televisions, and the internet. It seems that the media is obsessed with sensationalism, and this is especially true now as we’re moving into a sharply polarized election year. I understand that every market dip and decline, isn’t the beginning of the next 2008 Great Recession. Most clients would like to believe that they too can discern the difference, but in reality, that’s a very difficult prospect to manage for most people. We all remember the pain that was involved with watching the markets melt down between October of 2007 and March of 2009. Stocks weren’t safe, bonds weren’t safe, and even the Fidelity Primary Reserve money market broke the buck. There was a lot of pain, and that memory remains fresh, even after over a decade of recovery.

I’m best able to help clients navigate the emotional aspects of long term investing, through being as well informed as I can be, and by rising above the noise of the media as I dispassionately discern trends and the direction of the economy. Over nearly 30 years of practice, I’ve seen and worked through many periods of high stress. Such experience, and knowledge from dispassionate external sources, enable me other seasoned financial planners to discern the ice berg, from the ice cube, and help clients make good decisions, with long term objectives in focus.

The objective of a financial planner when it comes to managing emotions and behavioral responses is to help our clients remain on track to achieve long term objectives.
The fourth quarter of 2018 was a great example of doing exactly that.
The market climbed a wall of worry over such things as Brexit, trade negotiations with China, the Federal Reserve, a possible recession, and of course, impeachment was of concern as well. Since then, the market has since recovered to establish new all time record closing high values. In hindsight, we can clearly see that for those with the tolerance for holding risk assets, the end of the year presented an opportunity to acquire additional shares of stock in good companies, and dilute cost basis in the process. That wasn’t such a clear proposition on the 26th of December, but that’s where a seasoned financial professional can be of assistance, by helping clients to remain focused on the long term pleasure objective of a successful retirement, and overcoming the instinct to avoid pain by either selling, or not buying, at such points of inflection.

There is a direct correlation between successfully achieving long term investment objectives, and being able to successfully manage the emotional and behavioral aspects of market fluctuation.
The chances of success or failure depend on how consistently an investor has been able to rise above the constant barrage of negative sentiment, media sensationalism, and red arrows on the television screen. My job is to rise above that noise, and help clients successfully manage the emotional aspects of investing between today and tomorrow.