Emotions and the Markets

Every day since the Russian invasion has produced horrific news. Reading about civilians being targeted elevates almost anyone’s emotions and anger. There’s a sense of frustration that comes about when the constant stream of bad news seems relentless. Our hearts go out to the people of Ukraine and anyone affected by the war. 

If you want to help, here are some ways to do your part. Book an AirBnB in Ukraine and donate the rental to a displaced family. Axios has a great article on some ways to help, here. Unicef says send cash because that is easier to process and get aid in the hands of Ukrainians.

I do want to address when we (or any other financial professional) publish a chart of the S&P500 going up in the face of ongoing bad news, we are missing a key component. The emotional aspect of what investors are going through in that moment. It is much easier said than done when we say emotions should be taken out of decision-making, especially when it comes to finance. This can be a cold industry where the focus tends to be on hard numbers.

Every time we go out we’re constantly reminded how expensive gas prices are. Even if you don’t go out much, I’m sure you’re seeing gas prices on social media and in the news. The anger and frustration build up as we watch the cost go up as we fill up our tanks. The price we pay at the pump is bad news to our wallets. 

I manage money for a living. The last thing I want is to be in a negative frame of mind to start my day. (Probably why I never fill up my gas tank the first thing in the morning.) When you realize market movements are out of your control, you might start being emotionally detached from it. If the market moves up or down, you’ll feel the same no matter which direction it moves in. Believe me, we never wish the market hits a correction (a technical correction is a 10% pullback from a recent high) but when it does (not if, but when), we’re always ready to act to benefit our clients. 

One of the most common questions we’re getting now is, “what should we be doing about everything that’s been going on?”. For starters, our answer is not to shift clients’ money into oil stocks, we’d view that as short term, and market timing, two things we don’t believe in. We don’t know the perfect answer here, and anyone who claims to is merely guessing. What we do know is if you own a well-diversified portfolio of stocks and bonds, your money will stand the test of time. This is likely not the first world conflict of your time, and we can promise you that it won’t be the last.

For some additional context, we can look at how markets responded to bad headlines in the past, which is generally positive over time. Remember, I just said it’s easier said than done because those events happened in the past. Living through the below chart in real-time is a very different experience. Many Americans were understandably more worried about being able to pay their mortgage or if they were going to keep their jobs. Many people probably looked at their retirement accounts to liquidate. The last thing on everyone’s mind was portfolio performance. 

Again, this can be cold industry. But the numbers do help frame that markets are in fact resilient over time. If we detach from the emotional wreckage, that’s probably the only way to look at these charts. To do it in the moment takes time and experience to build towards. 

Here’s what I do know. To start the year, we knew that the Fed was planning to raise interest rates to combat inflation, so we applied slight tilts and tweaks to our portfolios for that event. Did we know that Putin was going to invade Ukraine in February? Of course not. And even if we did, what would’ve been the trade given market history in past conflicts? Unless we went heavily into commodities, every diversified portfolio would’ve been negative to start the year. If Putin were to come out and say, “We will end the conflict in Ukraine in 30 days time”, how would the markets respond? Would the market go up now or wait 30 days? Every Wall Street trader would’ve bought stocks before Putin even completed his sentence. Good luck beating that. 

But that’s the thing about investing. You can’t make today’s investment decisions based last week’s data. Said differently, driving a car while fixated on the rear-view mirror is never a good idea. 

In my career, I’ve found the biggest impediment to investor success was the investor. I’m not pulling anecdotal evidence here. There are numerous studies about the effects of jumping in and out of the market, Does Market Timing Work?, Market Timing: Opportunities and Risks, The Cost of Market Timing, and on and on. 

The problem that the previous investors ran into wasn’t knowing when to go to cash (though, on average, they tended to go to cash near the bottom of the market). The toughest thing for them was when to get back in. I know you’ve heard countless variations of this, but I’ve lived it. The best thing to do in a down market is often, well, nothing. An even better approach in a down market is buy because everything is cheaper. We completed light rebalances and tax loss harvesting trades in late January and early February ago across our client’s accounts. It’s logical, objective, and systematic. 

“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffet

We agree with you, Warren. Stay patient out there. 

Speaking of Warren Buffet, he actually made most of his money after the age of 60 even though he was investing since the age of 10. (Housel, CNBC) It’s not that Buffett didn’t hit home runs at an earlier age, it was simply compounding growth. He got invested and stayed invested, and he let time do the heavy lifting for him. Jumping in and out of the market simply short circuits the power of compounding. 

As Partner & Advisor, Chris Kaminski on our team likes to say, “Remember, markets don’t settle down, they settle up.”

Disclosures

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

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