Investing with Emotions

Wealth Advisor

In this video, Chris discusses the emotional side of investing and why it’s crucial to avoid following the herd or getting caught up in market hype, especially with the prevalence of market discussions on social media and news outlets.

Using data from Morningstar, Chris illustrates how investors tend to react to market fluctuations. When the market is rising, investors often feel confident and invest more, typically buying at higher prices. Conversely, when the market is falling, fear and anxiety drive many to withdraw their investments, selling at lower prices.

Chris emphasizes that this behavior contradicts the traditional investing mantra of “buy low, sell high.” He then presents data from 1993 to 2020, demonstrating that investors who reacted to market movements achieved an average return of 5.5%, while those who stayed invested without reacting saw nearly triple the return, at 14.8%.

The video underscores the importance of adhering to a sound, long-term investment strategy and not succumbing to short-term market fluctuations or popular trends. Chris encourages viewers to reach out with any questions and emphasizes the significance of investing with a long-term perspective.

Video Transcript

Chris here to make a short video on the emotional side of investing. We felt that this topic is more important to address now more than ever with the popularity of market talk on social media, just in news outlets in general, and why if you follow the herd or follow the new hot idea, clickbait articles if you will, why this can generally lead to negative returns in your portfolio.

So what we have here on the screen is a chart showing the normal economic cycle and what investors are doing during these times. So the data in this video is all from Morningstar, which is a leading data analytics firm in the financial services industry, and we are getting this data from measuring the inflows and outflows of mutual funds and ETFs.

So actually looking at what investors are doing with their money during these times. So when the market’s going up, in general people feel good because their money is growing and they feel confident about putting more money in the market.

So this typically leads to buying at a relative high point in the market. By contrast, whenever the market’s going down, people are very anxious, they’re worried, they’re, they see that they’re losing money in their portfolio. So the gut reaction is to take the money out and limit the downside risk.

If you do this, you’re doing the opposite of the cliché, buy low, sell high, you’re buying high and you’re selling low. So what this next chart is showing us is the average rate of return that the normal investor would have received from 1993 to 2020.

Again, this is data measured by inflows and outflows into the market. So during that time, if you were to just follow those major inflows and outflows in the market, you would have realized a rate of return of 5 .5%. If you would have used those same funds, but instead over that time frame, you left the money in the market and you didn’t react when the market was going down, you would have almost tripled that same rate of return and you would have had a 14 .8% gain.

So hopefully you found this helpful. We just wanted to make a quick video to highlight the importance of following a sound investment strategy and not reacting to what the hot topic is right now on social media or in the news. If we want to invest money, it’s always for the long term.

Please feel free to reach out with any questions. We’re happy to help.

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