The Roller Coaster Ride of an Investor’s Emotions

The landscape of investing has been particularly rocky in the second half of 2011.  Rather than focus on your experiences of the last few months, I'd like to revisit another challenging time that you probably remember.  

Three years ago yesterday, Lehman Brothers collapsed and stock markets locked in losses that resulted in the term "The Lost Decade".  Looking back, Lehman and it's bankruptcy is one of many contributing factors to the global economic crisis of 2008.  But, for our purposes today, it was a signature moment. 

Do you remember your feelings on September 18, 2008, and during the subsequent market free-fall?  For many of us, professional or personal investor alike, the roller-coaster of emotions listed in the chart below may be familiar.  After six months of increasingly alarming circumstances, feelings beyond FEAR of PANIC and DESPERATION were well-founded and nearly universal. 

 

  

What's interesting, and note-worthy today is that this roller coaster of emotions was not created in 2008 but is enduring and is being repeated and relived across decades and investments' ups and downs.  Emotions as they relate to investing are inevitable for most of us.  Reaction to those emotions and investor decisions are within your control. 

Actionable Advice:   

  • In his excellent 2010 publication The Little Book of Behavioral Investing, James Montier suggests that investors keep a journal or log of their investment feelings, behaviors, and reactions to learn, over time, to separate emotions from decisions.  I concur and have found great value in revisiting my thoughts over time!  You may want to find a way to keep track of your feelings about investing (when markets are up AND down).
  • When you enter FEAR and PANIC modes, remember that there are things you can control.  As I've previously mentioned, investing is a component of financial planning.  If you know your plans in advance, you are able to analyze the impact of a reduced current net worth.  Often, especially if initial plans were prepared with conservative assumptions, the implications may be more reduced than the inner voice of FEAR leads you to believe.
  • Stay tuned as I will be visiting the investment processes in the coming weeks.  Planning your process in advance is important and may protect you from the investor's emotional chutes and ladders.     

Required Disclaimer:  Any information is not a complete summary or statement of all available data necessary to make an investment decision and does not constitute a recommendation.  Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James.