Did you know....how you think and how you feel about investing may be as important as what you buy and when – despite the endless financial media trying to convince of the opposite.
It has been endlessly said, when it comes to investing, “it all comes down to fear and greed.” Some have said that the secret to investing is to be afraid when everyone else is greedy and to be greedy when everyone else is afraid. As if managing your own emotions wasn’t hard enough, now you have to do it in response to everyone else’s! This of course may be sound advice from an economics standpoint, but has very little effectiveness when it comes to making good investment decisions.
This week on the Trilogy Financial Blog we are zooming on the idea of having a “Growth Mindset.” What do we mean by this? It’s simple: having the emotional and mental frameworks necessary to stay focused on growth for the long-term. It means that how you think and how you feel about investing may be as important as what you buy and when – despite the endless financial media trying to convince of the opposite. This central self-discipline needed for long-term financial independence is what we call managing “Emotional Risk.” By staying objective in the midst of the highs and lows of market activity, you can actually have an effect on your long-term growth prospects.
The average investor, instead of trusting the market, is often trying to beat the market, and like shadow-boxing a giant, ends up getting beat up in the process. Want another example of fear run amock?
On November 1 of last year, the VIX (considered the stock market’s “Fear Index” by some) had climbed 40% in six days. By this measure, people were scared. Famous fear-mongerer CNBC was calling for higher volatility and danger in the markets^ as a result. What has happened to the S&P since? Well through March 27 (which included some recent downward corrections), the S&P500 had climbed over 10%. That’s an annualized return of over 20% per year at that pace. Perhaps President Roosevelt was right.
“The only thing we have to fear is fear itself.” – Franklin D. Roosevelt
I remember in those days leading up to the election how many people were asking whether they should sell out of the market. Some even more loudly after the election’s completion. Many since have been asking us at Trilogy what we are doing in the face of a “Trump economy.” These are all worthwhile questions for an economist. They are not however very good questions for your financial advisor. A better question, “Mr. Advisor, how are you going to help me ignore all this stuff that the media says I’m supposed to be worried about and stay focused on my goals?” Now that’s a question I would love to hear an answer to.
Any advisor who is trying to tell you the exact moment to be greedy or to be afraid is playing on hindsight. Even my example of what happened in and around the election only looks smart in retrospect. That’s why I used it.
Fear is a powerful motivator, and historically some financial professionals have used it to sell and make commissions for their clients. Have you considered a different way of looking at things? If one of the greatest influences on your success is level-headed focus on a worthy goal (having a growth mindset), what might happen if you focused on that?
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