Will your emotions hijack your investment strategy?

Posted 16 Oct 2018 by Patricia Bell, PFP


The behaviour of the markets is generally cyclical, and therefore our reactions to that market movement tend to also be cyclical. Pushing off making big investment decisions because of the state of the markets assumes we know when they’ll bounce back, a dangerous assumption. Sticking to a defined strategy is a better plan.

While here in Canada we may have only recently finished our Thanksgiving leftovers, our neighbours to the south don’t celebrate this holiday till the 4th Thursday in November. This year the 23rd begins the countdown to Christmas and is followed by the much anticipated and anxiously awaited “Black Friday” celebrations, bringing with it crowds and conflict at shopping malls and big box stores.

Black Friday these days denotes the start of a retail shopping spree but it was originally coined by the Philadelphia Police Department because so many people went out to shop that it caused traffic accidents and chaos in overcrowded stores and congested parking lots. Retailers however didn’t appreciate the negative connotations or the associations to Black Monday, on October 19th 1987, when the Dow Jones Industrial Average dropped 22.61% or Black Thursday, on October 24th 1929 which signaled the start of the Great Depression. They decided to rebrand it as their own and signify their best sales days, moving them out of the red and into the black.

Now I like a good sale too, but what has this to do with our investing strategy? Well, we know when the sale is happening so we’re all ready to buy. This isn’t possible with markets. The gurus on TV can look at averages and volumes and sentiment and all manner of data but no one knows with certainty when markets will go up. Or when they’ll go down. You can’t plan on picking the sale day in the markets. You may have heard the adage, “The best time to invest is today and the next best time is tomorrow.” It’s true!

What about the crowds and the lineups and even the potential of actual physical danger to ourselves of shopping on this particular day? The volatility in the malls can make us fearful of going out. This can happen to us when we’re investing too. We might decide to stay on the sidelines when things are uncertain and we’re afraid, causing us to miss the sale altogether. Or we allow ourselves to get carried along with the crowd, thinking they know something we don’t and abandon the strategies we’ve developed to suit our goals when we were more rational and calm.

Sticking to our budget can be a challenge when faced with all those shiny sale stickers or this year’s must have toy or gadget. There’s a reason retailers put those fun “don’t forget me” items next to the checkouts, it works! When we invest it’s important to remember the budget and our goals and why we planned in the first place. This will make us much more successful than giving in to the “flavour of the month”.

 

This chart helps us see how we can be ruled by emotions and make the wrong decisions. Your advisor knows emotions are powerful when things are uncertain and staying the course through all market cycles isn’t always easy. Talk to them before the roller coaster starts so you know you can ride out the waves with confidence.