Are YOU an Emotional Investor?

Matthew (00:00): You also don’t want to accumulate cash over the course of months and years just waiting for this opportunity to buy the dip, right? Shawn (00:18): Welcome back to Christian Financial Perspectives. My name is Shawn Peters. I’m joined today by Matthew Barrovecchio, and today we’re presenting this episode which was written by Bob Barber, “Emotional Investing: Are you an emotional investor?” Well, you may be susceptible to emotional investing if you do any of the following or can identify with the following. The first one can’t sleep well when markets are down. Matthew (00:42): Yep. That’s not a good one. Second one would be checking account values during times when the market is very volatile, which if you’re doing that, please stop. Shawn (00:52): Day traders do that. But if you’re a long-term investor, you shouldn’t be doing that. Matthew (00:56): Bingo. Shawn (00:57): Number three, fear of losing everything despite being diversified properly. Matthew (01:01): And then fourth, getting caught up in the media financial hype. Shawn (01:04): Yep. By the way, those media sites, when they’re talking about that stuff, their goal is to get you to keep reading more articles, to keep watching more of the videos. It’s just a whole thing. Effectively, it’s a financial media entertainment. Matthew (01:18): Emotion evokes action and that’s what they want. Shawn (01:20): Exactly. Matthew (01:21): But that’s not what we want. Shawn (01:21): Before we go any further, then we’re going to start with two scriptures for our foundation for today. Matthew, you want to go with the first one? Matthew (01:28): I’ll read both of them actually. Proverbs 3:5-6, “Trust in the Lord with all of your heart and lean not on your own understanding. In all your ways, acknowledge him and he will direct your paths in them.” And then the second one is one of my favorites, Philippians 4:6-7, “Do not be anxious about anything, but in everything with prayer and petition and thanksgiving, present your requests to God and the peace of God, which transcends all understanding, will guard your hearts and minds in Christ Jesus.” Shawn (01:55): Understanding financial emotions. First we’re going to hit you with definition of emotions. Matthew (02:00): From Webster. Shawn (02:00): Exactly. “Instinctive or intuitive feelings as distinguished from reasoning or knowledge.” Matthew (02:07): Finances and emotions. They don’t go together. It’s like oil and water. They don’t mix well Shawn (02:11): Nope. If you do shake them really hard, they’ll kind of sort of mix for just a bit and then separate. Matthew (02:17): So over the long term, they are separated. We have a quote here by Charlie Munger, the late and great Charlie Munger, “Be fearful when others are greedy and be greedy when others are fearful.” And so the idea here, first off, is I don’t want you to be greedy nor fearful. Shawn (02:34): In the traditional sense. We’re not saying greedy. Matthew (02:36): Correct. Right. But the idea, and this is something we’ll talk about over the next minute or so, is don’t feel like you have to run with the crowd. Don’t run with the herd. Right. There is this idea or this concept or this temptation to look at what everyone else is doing and follow. When reality, we should not be doing that. We should be sticking with whatever our objective plan is. Shawn (03:01): That’s right. That’s right. It kind of reminds me of Warren Buffet every time he’s in the news, it’s pretty much never about how much money he’s made. It’s almost always Warren Buffet is buying such and such stock in whatever industry, and it’s down 20%. It’s down. They talk about how down it is and he’s buying it. I mean, he’s been doing this for longer than I’ve been alive, and yet every time he does the same thing. Yeah. When the assets are down, he’s buying. When everybody else is running for the hills, he’s moving assets and the stuff that’s on sale. Matthew (03:35): Right. Contrarian. Shawn (03:35): So that’s kind of that idea, I guess, of when everybody’s being greedy. He’s one of those people that’s backing away. And when everybody is running away, well, he’s going to jump in. Yep. Matthew (03:44): Absolutely. Shawn (03:45): The financial media emotion game. So the media, all right. And there’s a lot of different forms of it. Matthew (03:56): I love the word game here. That’s really what it is. Shawn (04:00): So the media, number one, loves chaos and uses scare tactics. Matthew (04:04): And so they do that. And we have to remind ourselves, especially as Christians, we don’t serve a God of chaos. We survey God of order. Shawn (04:12): That’s right. And number two, the media creates political instability. It doesn’t matter which side of political aisle you’re on, but they definitely do that. Most of the news organizations at this point, it’s like their legal name has entertainment typically in it. Matthew (04:28): It’s true. Shawn (04:28): It’s not so much the news. It’s the financial entertainment news. Matthew (04:33): This third one, using dramatic language is something that they often do. Markets are falling off a cliff. If you look at the top of some of these financial websites, the headlines, the quick snippets, what they know you’re going to see first, it is always language that is either one extreme or the other. Right. And when you look under the hood, it’s usually not as dramatic as they make it seem. Shawn (04:56): Yeah. The headlines tend to be click bait. They effectively want you to click through to look at the article, except the fact that the statistics show that most people aren’t going to click through. So number four promotes FOMO – Fear of Missing Out. Matthew (05:12): I feel like we’ve heard about this one before. Shawn (05:13): Oh, yeah. Matthew (05:14): Yeah. Shawn (05:14): We’ve covered this one before, right. Matthew (05:15): Exactly. Yep. Number five, quotes returns from market bottoms and tops and never the long term. So again, it kind of goes back to one of the ones we just spoke about a moment ago when it’s talking about numbers and where we are. Again, it’s highlighting the extremes, again, to invoke emotion. Shawn (05:34): Yeah. They’ll talk about, oh, it’s 20% off the high, but when you look at it on the last couple years or something, it’s still like, oh, we’re still up 30%. Matthew (05:45): Well, and that’s… bingo. So we can look at where we’ve been so far this year up to this date, and you look at, yeah, we’re coming off of all time highs early this year in January, but when you zoom out and look at longer term, let’s just say since the year 2000, you realize coming off of the all time highs or being down from the all time highs, for the investor that’s been investing for the long term, you’re still very much positive, right. Shawn (06:15): Exactly. (06:16): And number six, the media creates a constant game of comparing returns. Matthew (06:21): And so we just did a podcast. Shawn (06:23): Yes, a previous episode. Matthew (06:24): A podcast episode on comparing with your neighbor. And so this is just another highlight of don’t do that. But it’s difficult because in this day and age, we are surrounded in this world with constant comparison. And that transcends the… Shawn (06:40): I mean it like it’s sometimes hard to resist doing that because we are just inundated with information. Matthew (06:48): Bingo. Shawn (06:48): From so many different sources. Matthew (06:49): Correct. Yeah. It transcends the financial topic. Shawn (06:53): On combating all these various information sources that we’re hit with all the time. A biblical response comes from Romans 12:2, “Do not conform to the pattern of this world, but be transformed by the renewing of your mind.” So some practical wisdom, why don’t you hit us with the first one, Matthew. Matthew (07:09): Yeah. The more emotional that the market is, the more you should consider buying versus selling. And now I think that there’s certainly some truth to this. Of course, you want to buy low and sell high when stocks are on sale. You want to put yourself in a position where you’re taking advantage of that. But there’s also a discipline component to this as well, which is I’m going to talk about here with number two and three as well. So staying disciplined towards your long-term risk tolerance. And then the third thing here, don’t accumulate excess cash just to time the market. Shawn (07:44): You’re never going to time the market perfectly. Even if you are going off of this emotions or you’re trying to buy low and you’re trying to sell high, well, you’re never going to quite hit the top of your bottom. Matthew (07:55): And so that’s the key, right? So while certainly in a volatile market, you want to put yourself in a position where if you’re making a move, right? You’re putting yourself in a position where you’re buying stocks on sale, but at the same part, you don’t want to put yourself in a position where you are doing that and extending your risk tolerance way higher than it should be (08:20): Because that’s not what you should be doing long-term either. You also don’t want to accumulate cash over the course of months and years just waiting for this opportunity to buy the dip, right? Because as you said a moment ago, you don’t want to market time. Well in that kind of situation, you have to market time successfully at least twice. You have to know when do I stop investing monthly with the disciplined approach and start holding on the cash, and then I’ve accumulated this cash, when’s the right time for me to say, “Oh, this is as low it’s going to get,” it’s impossible to do. And so individuals will often be better off if they just stick with their discipline plan and invest along the way Shawn (09:06): Be diversified properly, and be fully invested in whatever that diversification is, whatever that strategy is. Because remember, it’s not about timing the market. It’s time in the market. That’s what makes people the most successful. Matthew (09:20): Bingo. Shawn (09:20): So in conclusion. What’s that first one? Matthew (09:24): Yeah, declare war on emotional investing. I think this can be very much a spiritual battle as well. So that scripture, Romans 12:2 for y’all that are watching, and this might be something that you struggle with. I feel like that’s a really good scripture to memorize, meditate on, pray about. Shawn (09:47): Think like a buyer, not a seller, so be looking more for those buying opportunities and not constantly worried about, “Oh, I need to make sure to sell at the right time.” Because again, if you’re not talking about short term within the year, you’re talking longer term. You don’t need to be thinking like a seller right away. And you shouldn’t be selling your entire portfolio anyway, even when you get into retirement and you’re getting further along. Matthew (10:11): Good investors put their emotions aside and really just focus on the long-term. So again, it’s not about timing the market, it’s about time in the market. Combat the temptation to have a trader’s mentality with everything that you’ve been inundated with in the world, especially in the media. And just don’t pay attention to what your neighbors are doing. Focus on the disciplined approach and what’s right for you over the long term. Shawn (10:33): And also avoid the herd mentality when everyone is buying at high prices. Matthew (10:37): Right, exactly. Shawn (10:38): It can go nowhere but up. Matthew (10:40): Right. Shawn (10:41): It can go either way. Matthew (10:42): Exactly. Exactly. And a lot of times that’s predicated upon greed, and that’s not something that we want to subscribe to either. Shawn (10:51): We’ll close today with Ephesians 4:19, “Having lost all sensitivity, they have given themselves over to sensuality so as to indulge in every kind of impurity, and they’re full of greed.” Matthew (11:01): There we go. Shawn (11:04): Thanks as always for joining us. God bless and hope to see you next time. [DISCLOSURES] * Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors®, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors® believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.