Under Construction: Building a Sound Investment Philosophy
Scott Jarred, CFP, CEO of Jarred Bunch Consulting
The game of investing is a tricky one. Practice
may not always make perfect, because investors
are at the mercy of a vast information processing
hub: “The market.” Numerous factors impact
market performance daily. Information can
change hourly. And don’t forget its biggest
weapon that is every investor’s kryptonite:
Volatility. Why: Because volatility can drive
irrational behavior in investors.
Money is Emotional
Successful marketers understand that the most effective messages
stimulate consumers emotionally. While this article isn’t about
marketing, it gives us a unique look at the human psyche: Emotions
drive behaviors.
One would be hard pressed to prove that money isn’t an emotional
object. Enter volatility, the predator that feeds on our emotions. Now
enter its partner in crime, the resulting behaviors. Prompted by spikes in
volatility, emotions drive investors to endlessly try and craft the winning
formula for market performance. And everyone has an answer for what
works and what doesn’t. However, it’s precisely because of this fact that
investors fail at consistently crushing it in the market.
Just How Vulnerable Are We?
If financial behavior has taught us one thing, it’s that we’re more
vulnerable than we know. This is because we have a hard time realizing
when we’re being manipulated, especially when it comes to investing.
Interestingly enough, we’re just as easily manipulated by others
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(noise) as we are by ourselves (emotions). When this financially deadly
combination unites, irrational behavior is sure to follow. Now that we
know our weaknesses, it’s important to understand popular detrimental
behaviors, the emotions that cause them and how to overcome them.
Information Overload
“Dow Plummets 331, Oil Drops Below $50.” “Stocks Slide on Oil,
Economic Fears.” “Dow’s Charge Turns the Year Positive.” “Dow Soars
323 Points, Erases 2015 Losses.”*
All of these statements were headlines that ran in the Wall Street
Journal and USA Today in January, 2015. When the catastrophic
headlines dropped into investors’ laps stomachs churned. Losses
were immediately assessed and thoughts of damage control no doubt
started swimming in many heads. Would you be surprised that the
booming headlines followed the catastrophic ones by only two days?
For many investors, this ray of hope came too late; driven by the fear
of what may be coming next, investors who acted rashly two days prior
were now tending new wounds.
Volatile times in the market are magnified by the noise surrounding
investors. And the problem is that each talking head thinks they’re right.
Not stopping until they’ve convinced you, they effectively manipulate
investors into thinking they’re acting with the best intentions. Just
remember this: Disaster can result from even the best intentions.
Track Records & Forecasting
Investing is usually done to preserve our future. Investing also carries
risk. What a conundrum; no wonder investors will listen to every source of
information they can.
This behavior is largely driven by the fact that financial loss is felt much
deeper than financial gain. Hence why investors go to great lengths to avoid
risks, more so than finding the right times to capitalize. Increased volatility
triggers these emotions, enticing investors to regularly seek the advice
Fall | Winter 2015