The emotions are really starting to heat up. During most of the typical stock market cycle, most investors are able to keep their emotions well in check. That is particularly true of our clients, who tend to be a patient, mature, and generally cerebral bunch.
But during certain parts of the cycle, the mass of investors, including even our cohort of unusually smart and even-tempered clients, begin to behave less as individuals and more as a herd. As emotions take over, reasoning ability becomes compromised. Vision narrows, blood pressure elevates, time horizons shorten, and calculation gives way to expectation; what is happening right now becomes all important, while what is likely to happen longer-term appears entirely unimportant. The chance for profits seems both immediate and certain, while the danger of loss appears theoretical and distant.
With the market making new highs day after day, we are beginning to get those phone calls, and have those conversations. The content of these discussions sound something like this:
“Everyone is getting rich! Why do I still have cash?”
“We need to buy now!”
“I’m tired of underperforming when the markets are going straight up. I need a better strategy.”
At market extremes, whether the market is making exciting new highs or scary lows, the emotions of the crowd are a deadly danger to our long-term financial interests. At those market inflection points, our job as financial advisors is to refuse to validate our clients’ emotions as a basis for action.
That sounds really harsh. I still remember, more than twenty years later, one of my favorite clients, a retired woman of unusual grace and poise, telling me in a profoundly wounded tone, “You don’t want me to have any feelings!”
I was trying to explain to her, at the depth of the 2000-2003 market decline, that she should not sell out at the market low, amid all the bad news, as she had done in the three prior bear markets.
When my kids were younger, they loved Mad Libs, and filling out those forms prompted great hilarity during long car rides. “I need a noun! Now a verb! An animal!”
So here is a very simple Mad Libs style exercise about the current exciting market. I’ll provide four phrases with blanks, and a choice of words to fill them in.
Active investors are advantaged if they ______ low and ______ high.
Right now, the market is at an all-time ______. The mass of investors are _______ing. We should be _______ing.
The four words to use to complete our Investor Mad Libs are:
(One hint. You will need to use only three of the four words.)
Please let me know if this exercise makes sense to you, and if it changes your current thinking in any way.