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How to Take Your Emotions Out of Investing

Sunday, December 28, 2014

– by Sheila & Rich Jamison -

Decisions made based on emotions usually turn out to be bad decisions … especially when they defy logic. One person explained to me that losing money because of one such decision was ok because it let him to sleep better. HUH?!!!

This is true for life’s decisions overall, not just financial ones. Should I settle for a car that doesn’t meet my needs just because I’ve always driven a Chevy/Ford/Chrysler/VW (you name it)? I’m not a qualified psychotherapist, so I’ll leave general psychology alone and focus on the financial part.

Emotions vs. Logic

Behavioral finance studies why we do what we do regarding investing. It came about because we recognized that emotions often overrule logic. Though we know we should do one thing, we let our emotions dictate we do something else – perhaps even the opposite.

We’ve explored this numerous times, as recently as 3 weeks ago. (For a refresher click here.) That article inspired a number of people to ask, “I know I react emotionally and it’s hurt me in the past. How do I stop?”

Simple Does Not Equal Easy

Permit me to preface my response by acknowledging that this is a challenge. The steps below are simple – but not easy. They take commitment and perseverance. And it seems that even then, when you think you’ve got it down pat, that little voice you believed you banished can still be heard from time to time. My advice here is, “Get used to it.”

I don’t think that voice ever goes away entirely. But it can be tamed and controlled sufficiently to permit logic to have its say.

So What Can I Do?

Having laid down the gauntlet, so to speak, here are three traits to aim for. Instilling them can give you power over that voice, the one that alternates between greed and fear (even panic) without stopping in the middle for a breath.

Be Pragmatic: Choose fact over theory or fortune telling.

Some are greatly impressed with the pundit who said to get out of the market in October 2007 because there was a massive bear market coming. However, look further and you will find this same pundit also told everyone to get out of the market in 2003, 2005, 2009, 2011…

Others are greatly impressed with Modern Portfolio Theory (MPT) because it is so elegantly taught in textbooks in business schools. It’s also very simple and one size fits all! However, it was especially disastrous in 2008.

Now review the body of knowledge of Relative Strength investing. It isn’t perfect and it too has obvious periods of underperformance, but the weight of the evidence is in its favor.

Be Disciplined and Process-Oriented:

Be brave and resist those emotional urges to abandon your strategy when the markets roar – either up or down. Focus on the process and the results will take care of themselves. This is a mindset of helping you to stack the odds in your favor.

For example, many studies make it clear that there is momentum in the market. They show the best probability of finding a future winner is to buy a current winner and stay with it as long as it remains strong. Successful investors always look at stock selection in the context of portfolio management rather than as a series of isolated trades.

Be At Peace with What You Can’t Control:

Thought #2 was a challenge?! This one takes the most effort. It entails recognizing what is going to be is not always what you want to be. The market will do what the market will do. This will help you to be prepared, accept it, and take appropriate action according to plan. Then move on to the now. Focus on the present and leave the past behind.

In a perfect world, we’d all love to buy at the bottom and sell at the top. It doesn’t work because it can’t be done – unless you get lucky with an isolated trade – the world isn’t perfect! Accept this fact.

Relative strength is a trend following methodology. We use it because over 30 years of experience has shown us it has done well.

Wise investors accept the fact that nobody knows what the future holds.

However, also recognize a crystal ball is not necessary to be a successful investor. Remember that all strategies encounter certain environments that are not favorable to them. For example, Relative Strength suffers in choppy trendless markets and markets with major reversals in leadership. All strategies have weaknesses that will become obvious under the “right” conditions.

What does work all of the time? Nothing yet identified. The right question is what works most of the time? That is, on balance, what works better or more often than other strategies? We believe we’ve found this in Tactical Rotation using Relative Strength.

Important Reminder

Relative Strength – just as any investment strategy – is NOT a guarantee. There are no guarantees in this business. There will be times when all investments and strategies are unfavorable and depreciate in value.

Stick with your Winner

But when you’ve found a strategy that is successful overall, stay the course. Take appropriate action based on your plan, not based on that annoying voice that wants to create a new plan on the fly. Succeed by letting sound reason be your guide.

Worth the Effort

See? It really is simple. But as I cautioned right up front, simple is not the same thing as easy. Remember you don’t have to be perfect …you just have to be brave to succeed! Work toward this and we believe that you’ll find the result to be worth your effort. And we’ll be pleased to help you all along the way anytime you wish.

Reference:
Daily Equity and Market Report.. The Money Managers. Dorseywright.com. December 19, 2014.

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of the date of publication and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
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The S&P 500® is a market-capitalization-weighted index of common stocks.
Past performance is no guarantee of future results.

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