During his inauguration speech, Franklin D. Roosevelt left us with these famous words: “First, let me state my firm belief that the only thing we should fear is fear itself – a nameless, irrational and unjustified terror which paralyzes the efforts necessary to convert retreat into advance.
So what does Franklin D. Roosevelt’s speech have to do with today, you might ask? A decade of behavioral finance studies suggests his words are more than just an echo of a dark time in our distant past. In fact, that may be what we need to hear today.
We know from years of studying financial behaviors that many of our personal economic decisions are motivated by pleasure or fear. And, unfortunately, pleasure and fear are not equal. In fact, investors are four times more likely to act out of fear. And we are likely to see fear prevail in the current market environment.
What does a scary decision look like, you might be wondering? The most common choice includes, but is not limited to, market timing. This means that you are convinced that cash is safer than the market; therefore, you transfer all your assets to cash or CDs when the market goes down. Or you buy that annuity product based on a perfectly timed sales pitch. You are convinced that it will “cost” you nothing. And the annuity eliminates all your downside risk while giving you all the upside potential.
Sound familiar? If either of these resonates with you, you are not alone.
Understand that cash and annuities have a purpose in an overall plan. However, these are tools put in place long before the arrival of market volatility. Remember that running away with cash is only half the decision. You also need to figure out when to come back. And annuities often require careful consideration before entering into a well-designed financial plan.
Many financial planning practitioners understand the power of fear and how it leads otherwise smart and well-meaning investors to make bad decisions. Research from Dalbar, Inc., a company that studies investor behavior and analyzes investor market returns, consistently shows that the average investor earns between 50% and 75% less than the overall market over time. time. Average investors are individuals who do not work with a dedicated advisory team and often adjust their portfolios in positive and negative market conditions.
Average investors often lose focus on their goals and abandon their process, failing to keep the disciplines they have in place. A great visual representation of this can be found in a quote from famed economist Gene Fama. He said, “Your money is like a bar of soap. The more you handle it, the less you will get.
Gene is right. Investors with the greatest likelihood of success are those who stick to their plans and work hard from the start. Having a detailed plan that fits your needs eliminates the sting of fear. Contact the Financial Enhancement Group when you’re ready to start reducing financial regret.