Emotional Investing

What is emotional investing, and how to avoid emotional investing mistakes?

Watch as Erin Kennedy hosts Abby Reed and April Reed Crews from Reed Financial to discuss the topic of emotional investing. They address the challenges of reacting emotionally to market fluctuations and offer advice on how to feel more comfortable during these times. They emphasize the importance of having realistic expectations, a well-defined plan, and appropriate benchmarks for tracking goals.

Abby and April Reed and their team at Reed Financial believe in security, value, and peace of mind when it comes to your retirement and financial health. They counsel clients to assess their risk tolerance and adjust their portfolios accordingly. Whether you’re facing retirement—or looking to better understand certain investment ideas Reed Financial can help you address your most pressing financial questions. You can speak to Abby or April to help navigate the emotional aspects of investing and make informed decisions for your financial future here.

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Transcript:

Erin Kennedy (00:16):

Hello and welcome to Retirement Wealth Academy. I’m your host, Erin Kennedy. Thanks for being with us. This show is dedicated to helping retirees and pre-retirees sort through some of the most complicated topics and questions about retirement, and that’s why we turn to local experts. We have with us today, Abby Reed and April Reed Crews. Thank you for being here.

Abby Reed (00:34):

Good to be here.

Erin Kennedy (00:34):

Yeah, good to see you guys again. You are with Reed Financial, of course, and today’s topic is going to be emotional investing. Because we are all just glued to the headlines, it’s so hard not to react emotionally when we see all this red on the board, when we see so many stocks going up and down. So how do you help people feel comfortable when we see those headlines, April?

April Reed (00:58):

First is having realistic expectations. I think a lot of times, especially today, the media is pretty guilty of a lot of fearmongering and making it sound like the sky is falling, when in fact the movements that we’re seeing in the market are often very normal movements for the market. And, having a well-defined plan that you understand and that you have appropriate benchmarks for, I think is the other very important component of that. If your risk tolerance and your goals and your investment allocation are not comparable to the S&P 500, then that’s not the appropriate benchmark for us to be using. It’s not a benchmark that you can watch and be euphoric when it increases significantly or be overly concerned when there’s a sharp downturn, because that is unlikely to apply to you. So having some tangible ways to understand goals, define them well and track them appropriately is really helpful with that.

Erin Kennedy (02:02):

So you mentioned euphoria. I want to talk about the investing cycle of emotions, because we as human beings tend to react emotionally and then kind of jump into the markets when we shouldn’t and pull out when we shouldn’t.

April Reed (02:14):

Well, ideally what we would do is buy on the lowest day and sell on the highest day if that was a possibility. But since that’s just not how life works, human nature is the exact opposite. There are actually a lot of studies that show that individual investors lag behind institutional, because primarily they’re so emotional about their investing. And people buy, when you just mentioned the euphoric period again, they get euphoric, they get comfortable when things have been going well for a while, and that’s when they jump in. Usually, they’ve missed a lot of the growth by that point. And then conversely, when things get volatile and go down, people panic and sell. So it’s a cycle that you’re missing a lot of the growth and you’re locking in a lot of the losses by being emotional, instead of having a well-defined strategy where you’re keeping a strategy that will work for the long-term, no matter what those cycles look like.

Erin Kennedy (03:13):

Right, right. Abby, I’d like to talk through, then, how are you counseling clients when we are seeing these scary headlines? What should we be keeping in mind during these market fluctuations?

Abby Reed (03:23):

Market fluctuations are always very intimidating. They can cause a lot of anxiety, and that’s understandable. Especially as we get closer and closer to retirement, we have as much money probably as we’ve ever had. We’re closer to one of the biggest goals in our life that we’ve ever been, and so risk tolerance really starts to go down. A lot of times, people’s portfolios maybe don’t reflect that.

(03:49):

So before these market fluctuations happened, maybe it’s a time to assess your risk that you’re taking in your portfolio. It might be something that you’re not comfortable with anymore. You don’t have to take on the same risk as you did when you were 20, when you were still in that accumulation phase. So once you have that plan that’s a good fit for you, for your risk tolerance, your risk capacity. Then you know that while it’s never fun to look at your portfolio and see that it’s down, that is a natural normal thing over a long period of time.

(04:24):

The strategies that we use, the strategies that we build are, we take that into account. We know these ups and downs are going to happen, and so we build that into the portfolio. So we make sure that we are really developing these all-weather strategies. We don’t know exactly when those things are going to happen. We just know that they’re going to happen at some point in time. And so I think that gives our clients a lot of peace of mind. And also, education. So helping them understand how often these fluctuations happen so they don’t get caught off guard. They know and can remind themselves or call us and we’ll remind them that these things happen. This is the strategy that we’re using to take care of that to combat that, and you’re going to be okay still. The plan is still solid and it’s built for the long term.

Erin Kennedy (05:15):

So explain though, again, it comes back to the investing cycle of emotions, how if we are pulling our money out at the wrong moment, we’re kind of compounding our losses and often missing the best days.

Abby Reed (05:26):

So the best days and the worst days are typically very close together. I think one of the biggest misunderstandings a lot of people have is they underestimate volatility, and especially in the stock market. When people start to look closer at their portfolio, typically around when they’re starting to look at retirement, they’re seeing those ups and downs, and they’re not very comfortable with it. So that’s when people start to get a little bit more emotional. Our risk tolerance goes down. We have, most likely, as the most money we’ve ever had, and we’re so close to the finish line. That’s when we don’t want to make a mistake. We don’t want to see our portfolio go down and then maybe have to work for a year or so longer.

(06:11):

And so what happens is, say the market goes down 10, 20% in a short period of time, you decide that you can’t take it anymore – which is understandable, nobody wants to lose money – and you move to the sidelines. But unfortunately, what typically happens is the next, maybe even couple of days or week later, the market bounces back, and then you’ve solidified those losses. And then like April was talking about with the cycle, everything seems to be okay again. You get back in, but what if it goes down again? You’ve now lost twice and didn’t participate in the upswing, which would compound those losses. Getting out of the market is you have to not only choose when to get out, but also nail when to get back in, which is very hard to do, and so that’s why we focus on long-term investing and strategies that take a little bit of that risk off the table.

Erin Kennedy (07:12):

Well, talking through those scary headlines. I feel much better now. Thank you both so much for your time today, Abby, April. We appreciate it.

Abby Reed (07:18):

Thanks, Erin.

April Reed (07:19):

Thank you.