Emotions are often determinative in individual decision making. The lack of objectivity can lead us to make really bad and uninformed choices at important and stressful times. That in turn can result in long term and unnecessary pain.
So while we all have the capacity to act rationally and objectively, in times of perceived peril we are prone to do just the opposite. And while we can't change human nature, we can and should be aware of our propensity to do the wrong thing when tired or under stress.
Negativism and emotionalism can be harmful to our health, financial and otherwise.
Imagine if Robo Advisers Could Do Emotions has these cautionary words of wisdom and advice for us mere mortals:
"Andrew W. Lo is the Charles E. and Susan T. Harris Professor at
MIT Sloan School of Management, director of the MIT Laboratory for
Financial Engineering, principal investigator at MIT Computer Science
and Artificial Intelligence Laboratory, and chief investment strategist
at AlphaSimplex Group.
At a conference last year, I was approached by an audience member
after my talk. He thanked me for my observation that it’s unrealistic to
expect investors to do nothing in the face of a sharp market-wide
selloff, and that pulling out of the market can sometimes be the right
thing to do. In fact, this savvy attendee converted all of his equity
holdings to cash by the end of October 2008.
He then asked me for some advice: “Is it safe to get back in now?”
Seven years after he moved his money into cash, he’s still waiting for
just the right time to reinvest; meanwhile, the S&P 500 earned an
annualized return of 14% during this period.
Investing is an emotional process. Managing these emotions is
probably the greatest open challenge of financial technology. Investing
is much more complicated than other chores like driving, which is why
driverless cars are already more successful than even the best robo
Despite the enthusiasm of tech-savvy millennials—the generation of
investors now in their 20s and 30s who are just as happy interacting
with an app as with warm-blooded humans—robo advisers don’t take into
account the limits of human cognition; they don’t make allowances for
emotional reactions like fear and greed; and they can’t eliminate blind
spots. Robo advisers don’t do emotion. When the stock market roils,
investors freak out. They need comfort and encouragement. During last
August’s stock-market rout, Vanguard Group told The Wall Street Journal
it was “besieged” with calls from jittery investors and had to pull volunteers from across the company to handle the call volume."
While we can't take the emotions out of stressful situations, we can learn to recognize them and not react by doing the wrong thing in the heat of the moment.
This too shall pass should generally be the operative phrase of caution when witnessing stock market ups and downs, and especially the downs.
And recognizing that we are prone to adopt negative behaviors in times of stress can help us to take some deep breaths, sit still and do what's best and in our long term interests --- nothing.
Having a trusted and knowledgeable financial adviser who has 'been there and done that' also makes a great deal of sense.
And if he has his own skin the game, so much the better.
That's because the friendly knowledgeable and experienced adviser won't do to us that which he won't do to himself.
That's my take.