Emotions Have No Place In Your Investment Strategy

Chances are when someone smiles at you you will smile back. Even when you’re having a crappy day.  Emotions and their expression are contagious.

It’s human nature.  According to this article from Psychology Today:

Happiness extended up to three degrees of separation. People who were surrounded by happy people were more likely to become happy in the future. The statistical analysis showed that this was not just because happy people tended to interact with other happy people, but because people were more likely to become happy when they were around happy people. Even physical distance was important: those who had a happy friend within a mile were 25 percent more likely to become happy themselves. Those with a happy next-door neighbor had a 34 percent greater probability of becoming happier.

To be honest, I consider this a really good thing, mostly.  The majority of people (I think) are happy, at least I know they’re trying to be. 

So it’s good that happiness or at least the facade of it is contagious.  Happy is better.  But there are down sides to this phenomenon of course. 

Back in my endless drinking-in-bars days I remember how things would quickly escalate when male aggression and fear were contagious.  One guy says something to another, and all of a sudden the contagion of aggression and testosterone spread to everyone around.  That’s how fights get started.

For your finances, this phenomenon of contagious emotions is almost always bad.  When the markets start going down, and investors start selling, it’s likely you will feel a strong urge to as well.  Just as the smile from the passing stranger causes you to smile.

 

The Emotional Market

Of the seven largest one day point gains in the stock market in the past 20 years, five of them came within 30 days of one of the seven biggest one day point losses.

Yes, you heard that right.  It might be hard to remember, but even back in the fall 2008 when it seemed like the markets were on a plunge to Hades, they actually had wild swings.  As if they were overcompensating for the inevitable fall and resisting with all of their might.  The market was bucking like a wild bronco.

Have a look-see.   A full four of the seven biggest up days in the market in the past 20 years were in the fall of 2008.  When the world was ending…

 

On paper the autumn of 2008 was a disaster for the market, despite these four massive up days. What was going on? 

Crazy, contagious emotion, that’s what. 

As it became apparent the markets were undergoing a major shake up, many investors took advantage of sale prices.  And those emotions were contagious too.  So others did the same.  

Then the bears came back and spread their contagion.  And so on.  Obviously the bears won, for a few years at least. 

What looked like a shake up became a major correction.  And depending on which “emotional train” you hopped on you were left with either losses or big-time losses. 

But the best strategy was to watch it from afar, or not much at all.  To stay away, go take a beach vacation. 

If you stayed away from the contagious emotion you still saw big losses, but you didn’t succumb to the unpredictable bucking bronco that tossed others around for even bigger losses. 

Emotional investing is one of the worst kinds of investing.  How do you keep your emotions at bay when you’re losing your wealth and everything seems to be crashing down upon you? 

You have to consider the market like the seasons.  If you’re someone who really hates winter, you don’t go into winter thinking you’re going to die, or that it will never end. 

You go in with the understanding that it’s going to suck, but that spring will follow.  And think how awesome spring will be! 

The markets are the same.  The crash or downturn is the winter, and you have to suck it up if you don’t like winters. 

Get your damn jacket already. 

 

But What If

I realize there are skeptics, preppers, and doomsdayers that say “but the markets are not guaranteed to come back, they could stay down forever and America could go into a long decline and never recover”.

Theoretically, yes.  There’s no written contract with the deities of the universe that assures a market come back, but I’m just not buying this position. 

Like everything in life you take your chances and manage risk, and I’ll put my money on the stock market any day of the week, with the confidence that it will comeback, again and again. 

Perhaps I have a bit of capitalism bias, and yes I’ve been known to shout “‘Murica” after the National Anthem, but I’m pretty confident in my position.

I just realized shouting “‘Murica” after the national anthem is likely getting emotional 😉

Regardless, when it comes to investing you can’t let emotion overtake you.  Let the markets get on the mechanical bull.  Assuming you’re already invested, just watch from the sidelines.  Build up your white blood cells and resist the contagion.