Published 1/21/2019 in The Maryland Daily Record
Each quarter, we provide our investment management clients with some type of commentary about a wide range of topics. The last quarter of 2018 was such a wild ride in the stock market that we decided to highlight some of the foundational reminders of the behavioral attributes that contribute to long-term investment success. Particularly when faced with the nervous energy of a declining market, people often need support to remain focused on the longer view toward the achievement of their goals.
Sean Erb and Marriam Khan are financial analysts who are a part of my team at &Wealth. They are the people responsible for the day-to-day fulfillment within our financial planning practice. Together, we make up a healthy blend of IQ and EQ when it comes to our view of market activity. In this article, I share our collective input on these recent events.
4th quarter of 2018
Well, the market decline sure did deteriorate quickly! In what would have been a quarter of modestly negative performance, stocks took a sharp downturn in mid-December leading up to Christmas Eve only to be followed by the one of the single largest one-day gains in market history. All told, stocks fell by double-digits in the fourth quarter and ended the year in the red.
If we were not already there, we have officially entered a period of market volatility that we have not experienced since the Great Recession of 2008-2009. Volatility is not necessarily a bad thing. This type of market movement can provide experienced and patient investors opportunities to buy great companies at discounted prices.
Warren Buffett, arguably the greatest investor of all time, once said, “Be fearful when others are greedy and greedy when others are fearful.” We know it takes genuine courage to make these kinds of moves.
Taking a more positive view, for the first time in a long time, the selloff in stocks afforded an opportunity we have not had in almost a decade. We were busy up to the last minutes of trading on Dec. 31 realizing losses to offset gains to help clients reduce taxes.
We realize that some people view having losses as a purely negative event. In our view, this was a window of opportunity to help minimize future tax obligations, which is something that hasn’t been available to do in several years. Not to discount the emotional impact of a 15 percent decline in stocks, but when stocks go down, it is important to remember that this is a temporary snapshot in time.
Marriam recently attended a CFA Society of Washington, D.C., event focused on behavioral biases and investment decision-making. The emotional connection between investment decisions and the underlying emotional need that is met based on the approach was summarized as shown in this graphic:
We keep these connections close in mind. Market movements, whether up or down, affect these goals and can result in causing the experiencing of three significant emotions — fear, anger and joy. Investors tend to feel fear during a downturn in the market, anger at the bottom of the market and joy at the top of the market. We know from extensive research that the pain of loss is felt far greater the reward of gain.
With these emotional triggers in mind, it is important to ensure that diversified investment plans are in place to manage periods of sustained growth, inflation, low growth, and recession while helping to achieve financial goals and thus satisfying emotional goals in the process.
Sean Erb and Marriam Khan collaborated with Dorie Fain on this column.
—Dorie Fain, founder and CEO of &Wealth