You Better Behave!
As we head into the third quarter of 2022, the stock market continues to frustrate many. The S&P 500 officially hit bear territory towards the end of June and the volatility has continued into the start of this quarter.
For those who may have heard the term bear market before but don’t know what it means, I’ll share how the Wall Street Journal defines it.
“Stock’s enter a bear market when widely followed indexes such as the S&P 500 or the Dow Jones Industrial Average sink 20% from the high points.”
Inflation in June of this year was the highest it’s been since December of 1981.
Interest rates are rising, but so are home prices.
Gas prices hitting all-time highs.
Supply chain issues, Ukraine, Covid… Turn on the news and you can hear all the bad news you want to hear. It sounds scary.
A lot of it is.
Bad News Sells
Why does it sell though?
Our brains are naturally drawn to negative thoughts and information. This is called negativity bias.
There was a time when this was extremely helpful (and it still is at times today). Before we had electricity, transportation, and shelter, life was a bit more dangerous for the average person and negativity bias would have helped keep them alive.
Today, most of the world doesn’t face those same dangers but we still tend to focus on the negative and be drawn to it.
I don’t think our minds were built to consume the amount of information we do today. Especially the bad news.
Flashback 100 years and the news was just starting to be spread via the radio. If we go back to the Declaration of Independence, it took almost a month for the people in South Carolina to get the news.
Contrast that to today where you can know about a conflict or major event going on all the way across the globe within minutes of it happening.
That’s not healthy. You may agree but be asking what this has to do with investing. Good question.
This leads to the topic I want to discuss, behavioral finance.
What is Behavioral Finance?
“Behavioral finance is the study of the effects of psychology on investors and financial markets. It focuses on explaining why investors often appear to lack self-control, act against their own best interest, and make decisions based on personal biases instead of facts.”
Plato once said, “Human behavior flows from three main sources: desire, knowledge, and emotion.”
These sources show up in almost all situations. For example, dinner. You desire to be healthy. Emotionally though, let’s say you’re sad or stressed. Cheeseburgers, ice cream, or something else unhealthy sounds really good. You know eating that food isn’t good for you though.
What do you do? Most of the time emotion and desire win out in that situation. You might tell yourself some truths to convince yourself too. Something like: “I’m tired. I don’t feel like cooking anything. It’s just one night, I’ll do better tomorrow.”
That might hit close to home for some of you. I know it does for me.
My point isn’t to make you feel bad. It’s to show how powerful our emotions can be.
So what can you do? I believe there are three things you can do to help.
Get Rid of the Noise
The first thing I would recommend doing is getting rid of the noise.
Are you watching the news, listening to market commentary or podcasts, or constantly checking for updates? Stop would be my recommendation. At least limit how much you intake.
To some this may be easy, to others, you’ve been doing it so long that it might seem impossible.
Here’s a little (not so secret) secret, everyone you’re listening to has an agenda. If you’re going to watch or listen to something, first ask yourself what their agenda is.
Is it to get you to purchase something? Is it to sell ad space to someone else trying to get you to buy something? Is it to get more subscribers? To inform?
You might be thinking to yourself, well you’ve got an agenda too. You’re right, I do. I would be lying if I said I wasn’t hopeful the right people will find my content helpful and want to work with me.
My main goal is to help people think differently and make wise decisions about their money and their future.
The second thing I would recommend doing is stop checking your portfolio/account.
The more frequently you check your portfolio, the more risky you are likely to feel investing is, and the more likely you are to make changes.
While we discussed negativity bias earlier, the opposite tends to be true when it comes to our memories of previous investments or investing.
We tend to gloss over previous losses or periods of market corrections. We also focus on the good investments made or returns we’ve gotten.
This can lead to investors making decisions in the moment that hurt them in the long run.
Dalbar does a study on investor behavior that proves this theory every year. 2020 was the best year ever for the average investor and they still underperformed the market by 1.31%.
2021 was the opposite. The average equity fund investor earned 18.39%. That sounds pretty good until you hear that the S&P 500 earned 28.71% during that same time period. That’s a difference of 10.32% in a year.
Over the past 30 years, the average investor has underperformed the market by 3.52%.
For reference, $250,000 earning 3.52% over 30 years equals $705,777. That’s a lot of money left on the table.
Lastly, I would recommend you zoom out. Have you ever heard the saying “can’t see the forest for the trees?”
It’s easy to get too focused on the right now and lose sight of what really matters.
If you start to feel uneasy about what’s going on in the market (which is normal), I’d recommend revisiting your plan.
Turn your focus from what the market is doing to what your goals are and where you’re headed. Short-term market fluctuations almost never have an impact on long-term goals.
When you focus on the long-term plan it allows you to reframe what’s happening and focus on what you can control. Things like how much you’re saving or what your monthly spending is.
Another way to zoom out is to pull back from looking at the market with a short-term view and remind yourself of what the market has done historically.
Obviously what happened in the past doesn’t guarantee anything in the future. It can serve as a good reminder though that the market has done well over long periods of time.
In fact, since 1928, there has never been a 20-year period where the market has had a negative return.
Can You Do This Alone?
Yes. It’s possible for you to build out a good plan and stick to it without letting your emotions impact your decision-making.
There are some people that can do this, but in my opinion, that percentage of people is really low.
If you are not part of that group of people, I would recommend finding a good financial planner. I specify planner because many people will have an investment advisor that only focuses on investments.
I believe if the focus is primarily on your investments, you’re missing the boat. If you have a good financial plan and someone you trust to guide you through the good and bad times, you’re much more likely to make good decisions and avoid pitfalls when the times get tough.
We focus on planning (with investing as a piece of what we do) and would be happy to see if our firm would be a good fit to guide you and your family through the curveballs life throws at you.
Be on the lookout this quarter for more helpful information on investing in our upcoming Monthly Minute releases.
Get to Know Our Team
This past quarter was softball and baseball season in the Hyde home. Lee got to coach both Charlotte and Noah’s teams again this Spring.
It was Noah’s first season in coach pitch and he did great!
Charlotte did great as well and her team won the league championship!
The Ray family finalized their move back to Peachtree City.
While it technically happened at the beginning of this quarter, we wanted to celebrate Blair’s first birthday!
She had a fun party and also got to enjoy the 4th with Kyle and Genna!
HOW TO STAY CONNECTED
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