Fear and Greed are Enemies of Good Financial Decisions

When it comes to investing, emotions can be our worst enemy.  Feelings of fear and greed can override rational thought and lead to poor choices.   Make enough of those, and it can have a significant impact on your real-life return. As we head into the second half of the year, it’s time to hit the pause button on the noise and reflect on what really matters when it comes to stocks.

Watch Now:  Fear and Greed are Enemies of Good Financial Decisions

Battling Fear:  Do the Headlines Matter?

Right now, the news media is laser-focused on November, and this has people on both sides of the political spectrum squirming.  The big question:  does it matter?

For long-term investors, the answer is simply, "No."  The stock market has performed well under the leadership of both Democrats and Republicans.  It has weathered many events: wars, pandemics, recessions, inflation, and politics (to name just a few).  Yet, over time the stock market has thrived. 

The stock market is a collection of businesses.  Those companies are focused on being profitable and making money.  As owners of those businesses, we benefit when they do.   Government leadership can change the rules and the tax structure.  And those companies figure out how to navigate those obstacles.  They use their resources to focus on what will grow their earnings. 

Events like an election may cause some short-term jitters in prices, but at the end of the day, it comes down to profitability.

The Value of Perspective

Winston Churchill once said, "The farther back you look, the farther forward you can see."  The more history you consider, the better your perspective.  And for investors, a long-term perspective is critical.  So much emphasis is placed on headlines and the ticker tape that we can easily forget what matters.

Your financial plan is what matters.  It dictates decisions like allocation and investment selection.  What your needs are five or ten years in the future is more important than whether we are in an election year.  Your need for cash in the next 24 months matters more than whether we will have a recession or not.

History tells us that volatility is a normal part of our lives.  On average, we face bear markets, one year in five, and corrections (defined as a price decline of 10% or more) annually.  Accepting that as part of the journey can help us be better investors.

Greed: overcoming FOMO

In every bull market. there is a story that fuels the excitement.  In the late 1990's it was internet stocks.  Today, it is Artificial Intelligence.  A handful of names have driven the S&P 500 and Nasdaq composite to incredible levels. Those companies now comprise a third or more of those two major indexes.  

The headlines have many investors wondering how they can capitalize on the future potential of those major players.  Fear of missing out, or FOMO, is fear's ugly cousin.  Influenced by our greed, we often chase the hot names to be on the bandwagon to increase our chances of boosting our returns. 

Companies like Amazon and Nvidia may be stars over the next several decades.  But history also tells us they rarely reach that status in a straight line up and to the right!"  The current headlines are based on what has already happened, and as a result, the valuations of these names have grown to expensive levels.  Volatility in companies like this can be extreme.  Seeing a 50+% decrease in companies like this is not uncommon either.  Consider all of this before you chase the hottest ideas trying to boost your returns. 

What the news doesn't tell you

Late in 2023, we were told the Federal Reserve is going to reduce interest rates a handful of times this year.  At every turn, the financial media has anticipated when those cuts were coming.  And we are still waiting.  Stocks have posted strong returns this year despite not seeing interest rate cuts.  

What the media does not tell you:  earnings are growing.  Dividends are higher.  And both are projected to be even higher next year.  Those data points are what  matters to patient, long-term investors.  Much of what fills the media is just the sizzle without much meat behind it.

Turn off the TV: your financial plan > news headlines

There is often an inverse relationship between the value of something and the attention it receives.  The presidential debate has dominated the headlines and the media.  As an investor, the value of the commentary is very low.   Your lifetime and multi-generational financial plan has exponentially greater value and gets far less of our attention. 

"Turning off the news" can be great advice if the headlines are influencing your financial decisions. But it is also unrealistic.  We understand that what goes on in the world matters to all of us to some level.  Keeping it in the proper context is critical to avoiding big and potentially catastrophic financial mistakes. 

The election is coming.  We fully expect plenty of volatility, stress, and hand-wringing.  And yet, the potential outcome will not likely impact what you want to accomplish.  Your financial plan addresses the things most important to you and tailors how we use your resources to get there.