Emotional Investing
“Be fearful when others are greedy and greedy when others are fearful.”
Could this be right?? There’s no way what I am seeing on the screen is correct. Maybe my computer is malfunctioning? Let me restart this program… Nope, still shows the same thing.
I was sitting in my office, in disbelief! It was Friday, April 14, 2000 and the Nasdaq composite index plunged 355 points, or 9.67%, to 3,321 in one day. Instead of getting ready to go home and start my weekend, I just witnessed the Nasdaq set the biggest one-day decline on record. Not to be outdone for another 20 years when it lost over 12% on March 16, 2020.
I had to sit and wrestle with what just occurred, for the rest of the weekend as well as plan for the rush of phone calls I would receive from clients on Monday morning. Even though I had already spoken to many of them in the last month, and we had made shifts out of overpriced technology stocks at the end of 1999, they were scared.
Could you blame them? They had watched the Nasdaq peak at 5,132 back on March 10th and steadily decline. The index had lost over 35% of its value.
It was only my 2nd full year as a financial advisor, but I had to be able to articulate to my clients what was going on as well as calm their fears. Personally, I had never experienced anything like this before. The last major crash before this was in 1987, and I was 11 years old at the time.
I don’t remember ever talking about it as a kid. Probably because nobody in my family owned any stocks, so they were oblivious to what had happened in the markets.
It wasn’t that long ago, before this miserable Friday, where my clients and I were cheering at the amazing returns we were getting in the markets. Throw a dart at the newspaper (back when stock prices were listed in the paper) and you could hit a winner. Did the company just add .com to their company name? They would double in value overnight!
It didn’t make sense. But it didn’t have to. The Nasdaq Composite was up over 85% in 1999. Yes you read that right… over 85% in a year! That was off the heels of a 40% return in 1998. In fact, the tech companies that were driving this index were doing nothing but going up since 1995.
Nasdaq By Year - Historical Annual Returns. Source: Macrotrends
It was easy to lose all sense of reality and let greed take over. Who cares if Pets.com or Webvan never make a profit? Did it matter?? The mega-merger of AOL and TimeWarner validated to investors that this was the era of a “new economy” and it was here to stay.
Boy were we wrong! When’s the last time you heard anyone talk about AOL or TimeWarner… except when they are discussing the failed merger.
It’s difficult to take a step back and recognize that something is not right. Especially when it comes to money. Something in our brain shifts and all logic goes out the window. We are constantly battling the emotions of fear and greed. I don’t want to lose my money - fear. I don’t want to miss out on making money - greed.
Nasdaq Composite - 45 Year Historical Chart. Source: Macrotrends
Looking back, it’s easy to spot the signs. Companies going up in value, just cause they built a website. Or businesses having crazy valuations even though they were burning through cash and had no way to profitability.
Even though I was new in the industry, I realized that the music would stop one day and eventually investors would be scrambling to find a chair to sit on.
But no matter how many investors I warned, they weren’t interested in listening to my pessimism. It’s like they were hypnotized by the markets and you could see the dollar signs in their eyes.
After March 10, 2000, that look of greed eventually quickly morphed into a look of utter horror. The Nasdaq continued to decline for the next few years, till it bottomed out in October of 2002, after it had lost 78% of its value from the peak!
Action Items
So how does one remove the emotions when it comes to investing and avoid that deer in headlights look as the markets start to slide? Here are some strategies to help you stay objective:
Create a Plan: Develop a clear investment strategy based on your financial goals, risk tolerance, and time horizon. Stick to this plan regardless of market fluctuations.
Diversify: Spread your investments across different asset classes to reduce risk. This can help you avoid emotional reactions to the performance of a single investment.
Set Rules: Establish rules for buying and selling investments. For example, you might decide to sell a stock if it drops by a certain percentage or take profits if it rises by a certain amount.
Stay Informed: Educate yourself about the markets and your investments. Understanding why prices move can help you stay calm during volatility.
Limit Exposure: Constantly checking your account and financial news can lead to emotional reactions. Set specific times to review your investments and avoid making impulsive decisions.
Use Automation: Consider setting up an automated investment on a monthly basis. This can help you stick to your plan and make decisions based on your strategy rather than emotions.
Practice Patience: Remember that investing is a marathon, not a sprint. Avoid reacting to short-term market movements and focus on your long-term goals.
Seek Professional Advice: A financial advisor can provide objective advice and help you stay disciplined. I’m always happy to assist with your financial planning needs. You can book a quick call to see how I can help.
Not letting emotions interfere can be challenging but is crucial for making rational decisions.
Have any questions, concerns or just want to share a time when emotions got the best of you when you were investing? Just send me a message! 🙂
~Alex
Whenever you’re ready, there are 3 ways I can help you!
Organize Your Money Course: Are you ready to take control of your financial future, instead of letting it control you? This course will help relieve your financial anxiety and get you back on track.
Book a 1-on-1 Meeting: Whether you’re looking for assistance with your financial planning needs or are in the financial industry and you want to learn how to grow your practice, I can help.
Lake Avenue Financial: If you’re looking to build a relationship with a team who can help simplify, educate, relive the stress caused by money decisions and make sure you are on your way to financial independence, we are here to help!
Be Inspired to take Action
Join over 6,000 readers of the Inspire Action newsletter for tips, uplifting stories and actionable steps to guide you through your financial journey.