The impact of emotions on investing to be one of the biggest obstacles we can help our clients overcome.
Zachary R. Mersberger, CFA®, CRPC, AIF®
Apr. 2nd, 2018
As we meet and interact with our clients on a daily basis here at Mersberger Financial Group, we often find the impact of emotions on investing to be one of the biggest obstacles we can help our clients overcome. What I mean by that is that it is very easy to let emotions get the best of you as the market changes or experiences extreme volatility.
For example, it can be easy to want to invest more money in the stock market when the stock market is performing very well and it is very easy to want to withdraw money from the stock market when the stock market drops or experiences heightened volatility. In addition, as soon as the market begins to decline, it is very easy to think that it is the beginning of a bear market even though bear markets happen very infrequently. However, many times the best course of action is to do nothing at all and to stay disciplined to the current asset allocation plan in place. With Mersberger Financial Group, we typically have a customized financial plan built for our clients that can help guide our asset allocation plan and decisions to adjust that plan.
Historically, the market has often experienced heightened volatility and has also frequently experienced substantial pullbacks or drops. However, the market has still grown substantially over time even accounting for these frequent pullbacks. Volatility and short-term, minor market declines are very normal.
The large declines resulting from a bear market are much more detrimental to an investor’s financial plan, however, these happen very infrequently. As an example, according to the attached article from Guggenheim Investments, the S&P 500 has experienced 77 market declines of 5-10% since 12/31/1945, which is an average of more than one per year. However, the average length of the decline was only one month and took only one month to recover from. There have even been 27 market declines of 10-20% since 12/31/1945, with the average length of the decline is only four months and taking on average only three months to recover from.
As one can see from these statistics, the market has short-term pullbacks quite often but recovers quickly and then continues to rise. This means that it is likely not prudent to withdraw money invested in the stock market every time there is a negative headline or the market has a bad day. Emotionally, this may seem like the smart thing to do, but investors are potentially giving up continued market gains by doing this. In addition, if the market immediately rebounds after an investor withdraws their money, they will be hesitant to get back in and may end up sitting on the sidelines watching large gains they could have been a part of.
This is why we believe at Mersberger Financial Group that a disciplined asset allocation plan in accordance with a customized financial plan is critical to each of our client’s long-term financial success. This can help our clients keep their plan in perspective and not make short-term, irrational and emotional decisions to move in or out of the market based on news headlines or short-term market movements.
In addition, a disciplined asset allocation process can help our clients protect and cushion their portfolio against a larger, longer-term bear market which happens much more infrequently. From the same article quoted earlier, you can see that the S&P 500 has experienced declines of 40+% only three times since 12/31/1945, however, those declines lasted 22 months on average and took 57 months to recover from on average. These are the market declines that can more seriously affect a portfolio. Ensuring that our clients have a proper asset allocation plan in place can help protect their portfolio from these larger declines and ensure that their chances of long-term financial success stay intact.
Please contact our office if you have any questions regarding this topic.
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