There’s a lot to this whole investing thing, isn’t there?
There’s the need to figure out how much to invest to be adequately prepared for retirement or to help our kids pay for college. But that isn’t really all that difficult since there’s software to help map out a retirement plan and there are calculators to help prepare for college.
There’s the need to figure out our optimal asset allocation so that we build a portfolio with the right mix of stocks and bonds. But again, that isn’t really all that difficult since there are questionnaires that can point us to the right balance.
There’s the need to choose the right investments. But even that isn’t all that difficult. As we emphasize again and again, the key to choosing good investments is choosing a good investment strategy — one that makes sense, given your age, goals, and risk tolerance; one whose design you understand and agree with; and one that requires no more of you than you are willing to do, such as the number of trades you may have to make each year.
No, those aren’t the tough parts of being an investor. The tough stuff has nothing to do with calculators or spreadsheets. It has everything to do with managing our emotions, especially when the market heads downward, as it has in these early weeks of 2022.
Feeling bad, yet moving forward
No matter how experienced you are, downturns don’t feel good. They can make us fearful. They can make us wonder whether we’ll be able to achieve our goals.
So much of this has to do with managing expectations.
To invest is to put money at risk. We shouldn’t be surprised by downturns, we should expect them. And when a downturn comes, we can expect to feel bad. It’s simply part of our human design. Psychologists call it loss aversion. It’s what we all intuitively know to be true: it feels really lousy to experience a loss. In fact, when comparing what a loss feels like with a gain of the same magnitude, the loss will feel much worse than the gain will feel good.
The hardest work of an investor is to feel those lousy feelings and keep moving forward. When we see red numbers in the day’s market report or significant losses in our own portfolios, that can give us a pit in our stomachs. It can make us want to run for the exits, to stop the pain, to sell.
What we do — or more importantly, what we don’t do — in the face of a brutal downturn is the hardest work of an investor.
No gym membership required
We’re all drawn to hero stories. We love to read books or watch movies about someone who pursued something worthwhile and battled against all odds to achieve it. We admire the physical effort and hard work that goes into a victory on the field of play.
The hard work of an investor isn’t about hours in the gym or running extra miles. The hard work of an investor is about battling fear. It’s about confronting the questions: Now what will I do? What if I won’t have enough?
In the midst of so much noisy emotion, this is when we need to listen to the small voice of logic.
If we’re listening closely, we can hear it reminding us that to sell now is to lock in a loss. To grab the wheel now and let our emotions guide our decisions is likely to do more harm than good.
And if we’re paying attention, we can hear someOne reminding us to cast our cares on Him, to trust in His provision, and to rest in His peace.
In fact, that’s what was so encouraging about the brutal downturn of early 2020, when the market fell 34% in just 16 trading days on fears about the global pandemic. It had never fallen that far that fast. And who knew what was coming next?
In the midst of that scary time, many SMI members demonstrated great financial wisdom. Through a survey of our members, we found out that very few made any changes to their portfolios at that time, other than those called for by the SMI strategy or strategies they were following. What got them through that tough period were some practical things like knowing enough market history to understand that there would be downturns from time to time and following an objective investment strategy.
Just as importantly, what got them through was their faith. Some 85% of respondents cited prayer as an important key to weathering that storm, with 550 respondents mentioning 73 verses. We put them together in a downloadable document (PDF) that I highly recommend reviewing.
No one likes downturns. You don’t like them and neither do we. But here we are. Now’s the time to do the hard work of an investor. To be able to hear the loud voice of emotion and keep moving forward, guided by the voice of logic and the Voice of faith.
