How to Keep Emotions Out of Investment Decisions

My strategy might surprise you

Not long ago a caller to my weekly radio show won the applause of the day for asking a question that might be on your mind as well:

“Ric, how have you personally learned to keep emotions out of your investment decisions?”

He found my answer surprising. Perhaps you will too.

“What makes you think I have my emotions under control?” I replied. “As a matter of fact, I’m not able to avoid emotional reactions any better than you are.”

This might seem shocking. After all, I’ve been a financial advisor for more than 25 years, and tens of thousands of people rely on me and my firm to manage their investments. So what does it mean if I can’t manage my own emotions?

Think back to 2008, when the stock market was falling 65% in value. I’m sure you were scared. And so was I — how could anyone not have been frightened?

But instead of selling my own investments in a panic or telling clients to do that, do you know what I did?

I turned to my colleagues at Edelman Financial Services. We met frequently to evaluate the latest economic news and market activity, and we discovered that these group sessions created vital support for each other: When one of us was feeling shaky, others helped provide reassurance. It was almost like grief counseling.

And this was vital — because our nervousness maximized when we each started thinking about our own personal accounts. But when we focused instead on the firm’s asset base, our emotions were removed. As a firefighter once told me, “When I arrive at the scene, people are always in a panic. But I never am. After all, it’s their crisis — not mine. And becoming panicked like them doesn’t do anyone any good. So I just go about my job, and we get through the crisis as quickly as we can, minimizing the damage.”

A similar thing happens when a loved one dies. Everyone is sad, but not everyone collapses in sobs at the same time. One moment finds you hugging a loved one; then later someone is hugging you, offering welcome and needed assurances that you’ll get through it. That’s how I and my colleagues at EFS got each other — and our clients — through the emotional stress of 2008: We relied upon each other.

And we had much more than mere emotional support to help us. We didn’t get through the crisis by singing Kumbaya, hugging each other and saying, “there, there.” Instead we gave each other an as-needed Cher-slapping-Nicolas-Cage admonition to “SNAP OUT OF IT!” along with a reminder that our disciplined investment management approach would enable us and our clients to survive.

Indeed, our extensive diversification and strategic rebalancing while maintaining a long-term perspective were precisely what were needed, and they were precisely what we were doing.

Yes, my calm colleagues were able to reassure me that our investment management program — which I’d designed, by the way — was going to get us through the crisis. So I told myself to relax and get back to the business of reassuring our clients.

You see, all I had to do was let my colleagues remind me that our investment management philosophy is based on the academic work of, not one, but three Nobel laureates.

I’m not smart enough to beat my emotions. Instead, I’m smart enough to know that I can’t beat them. So I enlist support from others. And that’s what we encourage our clients to do: When you’re nervous, don’t sell in a panic like many others do. Instead, call us. We’ll help you get through it.

The message is clear: Rely on an advisor. But you must make sure that your advisor has two vital attributes: a disciplined investment approach and the experience to know how important it is to stick with it during difficult times.

If your advisor has no proven investment approach — if all he or she has done is sold you a bunch of investments that you were willing to buy — and if he or she didn’t go through the crash of 1987, the panic of 1994, the tech bubble of 2001 or the terror attack of 9/11 — then he or she may panic as much as you. And as our firefighter friend taught us, having two panicking people doesn’t lead to good outcomes.

Many people went through 2008 either without an advisor or with one who left them no better off than if they had been alone. In their panic they sold their investments, often at huge losses. Indeed, Americans continue to have 48% of their assets in cash, according to a survey taken last summer by BlackRock, the world’s largest investment manager, and most of them say they have no plans to decrease their cash holdings anytime soon.

These people are clearly acting as their own advisor. But as the adage says, a doctor who treats himself has a fool for a patient.

I don’t make important decisions about my own investments because I know I’m too emotionally involved. So are you when dealing with your own money. That’s why we’re all better off talking with a talented, experienced advisor — one who can be objective when we’re not.

Our clients understand this. They hire us because they know we’re disinterested — not uninterested but disinterested. That is what enables us to make objective decisions that serve their best interests.

That is why I am proud to be a client of Edelman Financial Services.

Originally published in Inside Personal Finance May 2014

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