Pay attention to investor sentiment… including your own

Rising interest rates, falling stock prices, government dysfunction, and a war between Hamas and Israel are all adding to investors’ angst. But nothing hurts investor confidence more than losing money.

2022 was a bad year for stocks and bonds recording returns of -18% (S&P 500 stock index) and -13% (Barclays Aggregate Bond Index), respectively. Now almost two years later, stocks and bonds are still trying to climb out of the hole dug in 2022.

Being “good investors” and sticking with their long-term investment strategies has done little to restore investors’ account balances. Bonds have lost money again in 2023, and stocks remain more than 10% below their previous highs.

As time passes, and markets continue to churn, investors begin to wonder if they are being foolish sticking with strategies that aren’t working. In other words…

Investors are growing impatient.

But now more than ever, investors should take the long view.

Investor Psychology

I have always been fascinated by investing. As a young stockbroker, then later as an advisor, I relentlessly pursued the best investments. And through critical analysis of the economy and markets I tried to uncover both risks and opportunities that others didn’t see.

However, as my experience grew I came to understand that even the best investments cannot overcome poor investment decisions driven by emotion. In fact, to help clients succeed, I came to understand that managing emotions was just as important as managing investments.

Greed, Fear, and Impatience

When it comes to emotions that are typically harmful to investors, greed and fear are at the top of the list. However, impatience, while not nearly as dramatic, is not that far behind. 

Fear takes hold when markets are declining. It starts as doubt when investment values take an initial hit, then enlarges into regret as losses mount, and finally culminates into a panicked belief that markets will never recover and the only way to preserve what is left is to sell everything and stick it under the mattress. Thankfully that is not where we are at today, but that is where things were in the spring of 2010. 

Greed is a similar animal, but it takes hold when markets are rising. Like fear, it starts with doubt. Doubt that one’s investment strategy is not doing as well as it could be. This doubt then morphs into regret for not capturing all the gains that everyone else seems to be enjoying. Then like fear, greed culminates in a throwing-in-the-towel moment. But instead of selling everything, the investor puts all their money in the most aggressive investments with the belief that these investments will never lose value. Of course, we have all seen this movie before and know pretty well how it ends.

Fear and greed are dramatic emotions that can result in dramatic and destructive decisions.

Impatience is a somewhat different animal. Impatience tells investors that what they have been doing is no longer working. Impatience tells investors that things are bad, and getting worse, and it is time to take action. Impatience tells investors that passively doing nothing is getting them nowhere fast and costing them money in the meantime.

After two years of negative returns in the stock and bond markets, impatience is what is now threatening investors’ long-term performance. Investors would do well to ignore the voice telling them, “Don’t just sit there… Do something!” Instead, listen to legendary investor and Warren Buffett’s partner at Berkshire Hathaway:

“The big money is not in the buying or selling, but in the waiting.” Charlie Munger

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