I recently attended Charles Schwab’s IMPACT Conference in Denver, an invitation-only annual gathering for registered independent investment advisors. One conference session of particular interest reviewed how emotions impact investing and provided tips on preventing behavioral biases from sabotaging long-term objectives.
Investors often say one thing, but proceed to do the opposite. We want to act rationally. However, emotional biases are difficult to avoid and can easily interrupt our long-term investment goals.
The hard truth is, investors are irrational. Don’t fight this fact, but make an effort to understand how to manage emotional biases. As Warren Buffett advised, “What you need is the temperament to control the urges that get other people into trouble in investing.”
In order to reduce the potential for irrational decision making, investors should embrace volatility, ignore the noise and focus on what they can control.
Volatility is the up and down movement of the stock market over time. The severity of these movements is not always the same. Understanding this behavior gives each investor an advantage, the understanding that volatility is part of investing. These up and down movements of the market present opportunities to buy when investments are low and sell when they are high.
The second point – ignore the noise. We live in a digital and media driven world. Information is constantly at our fingertips. The best thing an investor can do is recognize that noise can be misleading. Take this headline from The Wall Street Journal, “U.S. markets tumble as fear spreads.” A reader would think this headline came straight from the financial crisis, but in reality it’s from Jan. 25, 2014, after the market was down only 3.1 percent from its all-time high. Remember, forecasts are not facts. We should all take time to stop and question if our decision making is being influenced by noise and, if so, take a step back, revisit your plan, investment time horizon and talk with your advisor before making any changes.
Third, focus on what you can control, instead of focusing on market outcomes, volatility, economic policies and/or news content. Rather, turn your attention toward:
• Investment allocation;
• Risk exposure;
• Rebalancing strategy;
• Tactical adjustments;
• Your behavior and reaction to volatility and noise.
What you can control is the foundation of your personal investment plan. Understanding your risk tolerance and your perception of loss will help you recognize what you are capable of. Every strategy begins with an investment goal, whether its saving for retirement, college or a second home, the point is to have an objective. Know who you are, create an investment allocation relevant to your risk tolerance, rebalance the strategy, make tactical adjustments and manage your emotions. If you have questions pertaining to your investment plan, contact us. We would be happy to help.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.