Emotions

Emotions and your money

Begin now

Emotions can cost investors a lot of money

Emotions can be a great asset in life, but when it comes to investing, they may be a liability. In volatile times, equity investing can feel a lot like riding an out-of-control roller coaster. There’s the thrill and excitement when the market goes up, but also the fear and panic when it falls. These strong emotions can cloud an investor’s judgment, resulting in costly mistakes.

Optimism

Fear

Impatience

Excitement

Overconfidence

Denial

Regret

Panic

Despair

Hope

Relief

Optimism

Greatest opportunity for gain Fear and panic cause many equity investors to sell at the bottom of a bear market. However, this point in the equity market cycle actually provides investors with the highest growth potential over time.

NEW BULL MARKET

BEAR MARKET

BULL MARKET

Greatest risk of loss The old adage says “buy low and sell high,” but many investors do just the opposite. Motivated by excitement and overconfidence, they often buy at the top of a bull market, just in time to see their investments decline.

Westcore Funds/Denver Investment Advisors LLC, 1998.

Are you an emotional investor?

The following are 5 potentially costly emotional mistakes. Have you ever made investment decisions based on emotions and not on fundamentals or sound advice? Explore these costly mistakes to find out why many investors make them and how you can avoid them.

Impatience

Overconfidence

Fear

Panic

Indecision

Impatience

Investment Trap: Trading more frequently to try to quickly enhance returns Unintended Consequence: Potentially higher costs and lower returns

Many equity investors get impatient and try to enhance performance by trading more frequently, constantly moving in and out of equities in search of higher returns, but often without success. DALBAR, a leading investment research firm, found that the average equity fund investor underperformed the S&P 500® Index by 5.9% over the last 30 years!

Consider staying invested. Over time, a steady investment approach generally outperforms strategies that rely on impulse buying and market timing.

10.0%

4.1%

S&P 500® Index

Average Equity Fund Investor

Annualized returns, 1988-2018

AVOIDING THE TRAP

5.9%

A performance gap of

Source: 2019 Quantitative Analysis of Investment Behavior Supplement, DALBAR. This study utilizes data from the Investment Company Institute and Standard & Poor’s to compare investor behavior with the returns of the overall equity market. The Average Equity Fund Investor represents the aggregate action of all investors in equity mutual funds. Investor returns are determined using the change in total equity fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. The S&P 500® Index is an unmanaged index of large-cap U.S. stocks that is considered to be representative of the U.S. equity market.

Emotional investing can reduce an investor’s portfolio returns

Back to list of Emotions

Overconfidence

BEST Performing Asset Class

Emotional investing can reduce an investor’s portfolio returns

(Ranked by annual return and year)

WORST Performing Asset Class

(Ranked by annual return and year)

+37.28%

Emerging Market Stocks, 2017

-14.58%

Emerging Market Stocks, 2018

Could emotions be affecting the type of equity investments investors choose? Have they invested in a stock or asset class simply because it’s the “hottest pick” in today’s market or a friend recommended it? Although this approach may work at times, it comes with a lot of risk. Investments that perform well one year may not do as well the next.

Be wary of chasing performance. Work with your financial professional to select investments based on strategic planning and in-depth research, not on emotions or hot tips!

Investment Trap: Relying on “hot” investment tips to help boost performance Unintended Consequence: Increased risk of loss

AVOIDING THE TRAP

Source: Wilshire Compass, 2020. Emerging market stocks are represented by the MSCI Emerging Markets Index. Asset class rankings are based on 9 indices representing different asset classes from bonds to international stocks. Investments in non-US stocks are subject to additional risks including political and social instability, differing securities regulations and accounting standards and limited public information.

What a difference a year makes—Last year’s winner may be this year’s loser!

Back to list of Emotions

Fear

Investment Trap: Waiting too long to get back into the equity market Unintended Consequence: Inability to capitalize fully on a potential market rebound

In bear markets, investors are often reluctant to invest in equities because of earlier losses and the fear that they’ll make more costly mistakes. Some investors delay making investment decisions and wait for definitive signs of a market recovery before moving assets back into equities. While this approach may seem sensible at the time, it can significantly reduce a portfolio’s return.

Consider easing back into equities with an automatic investment strategy such as Dollar Cost Averaging (DCA).

AVOIDING THE TRAP

+41.8%

Median first-year return

Nearly half of a bull market’s total return is generated in the first year.

Median total return

+85.7%

Note: Past performance is not a guarantee of future results. The Dow Jones Industrial Average is an index that consists of 30 of the largest and most widely held public companies in the U.S. Indices are unmanaged and cannot be invested in directly. Data sources: FactSet, 2020, and The Leuthold Group, 2018, from the following article: Thomas Franck, “On the Bull Market's Ninth Birthday, Here's How It Stacks Up Against History," CNBC, March 8, 2018.

Note: Dollar cost averaging does not guarantee a profit or protect against a loss in declining markets. Dollar cost averaging involves continuous investment in securities regardless of fluctuating price levels. Before starting such a program, you should consider your ability to make purchases through periods of fluctuating price levels. *Data Sources: FactSet, 2020 and The Leuthold Group, 2018, from the following article: Thomas Franck, “On the Bull Market’s Ninth Birthday, Here’s How It Stacks Up Against History,” CNBC, March 8, 2018. The Dow Jones Industrial Average is an index that consists of 30 of the largest and most widely held public companies in the U.S.

Back to list of Emotions

Returns of the Dow Jones Industrial Average for every bull market since 1900.

Panic

Investment Trap: Selling equities in down markets and moving to cash for short-term safety Unintended Consequence: Potential shortfall in retirement income

While stocks can certainly drop in value over the short term, they’re also one of the few investments that offer the long-term growth potential necessary for investors to reach their retirement goals. For example, despite numerous wars, recessions and financial crises over the last 30 years, $100,000 invested in stocks would have increased to $1,727,378, outpacing bonds and cash by more than $1 million.

Stay calm and maintain your long-term focus. Your financial professional can help you put current market conditions into perspective.

Note: Past performance is not a guarantee of future results. Illustration not to scale. Stocks are represented by the S&P 500® Index; bonds by the Bloomberg Barclays U.S. Aggregate Bond Index; and cash by the BofA Merrill Lynch 91-Day Treasury Bill Index. Stocks are subject to significant price fluctuations and therefore an investor may have a gain or loss in principal when shares are sold. Government bonds and Treasury bills are subject to interest rate risk but are backed by the full faith and credit of the U.S. government if held to maturity. Indices are unmanaged and cannot be invested in directly. Source: Wilshire Compass, 2020.

Stocks $1,727,378

Stocks have historically outperformed bonds and cash over time

Hypothetical growth of $100,000 over 30 years, 1989-2019

Bonds $560,086

Cash $237,830

AVOIDING THE TRAP

Back to list of Emotions

Indecision

Investment Trap: Staying in cash to help protect assets from market volatility Unintended Consequence: Loss of purchasing power over time

It’s true that cash investments like Treasury bills and money market funds can help preserve principal and provide investors with liquidity in turbulent markets. But over time, they’re unlikely to generate the returns needed to offset the impact of taxes and inflation.

Review your asset allocation mix. Your financial professional can help you determine the appropriate level of liquidity (cash and equivalents) for your portfolio.

Source: Morningstar, 2020. Stocks are represented by the Ibbotson Large Company Stock Index; bonds by the 20-year U.S. government bond; cash by the 30-day U.S. Treasury bill; and inflation by the Consumer Price Index. Stocks are often subject to significant price fluctuations and therefore an investor may have a gain or loss in principal when shares are sold. Government bonds and Treasury bills are subject to interest rate risk but are backed by the full faith and credit of the U.S. government if held to maturity. The data assumes reinvestment of income and does not account for transaction costs or taxes. No state income taxes are included. Indices are unmanaged and cannot be invested in directly. Past performance is not a guarantee of future results.

10.0%

Stocks

Bonds

Cash may not provide the growth potential necessary to achieve your retirement goals!

Real rates of return, 1926-2019

Cash

5.2%

5.5%

0.6%

3.3%

-0.8%

AVOIDING THE TRAP

Back to list of Emotions

Team up with your financial professional to build a disciplined investment strategy that can help you avoid costly emotional mistakes!

Annuities are distributed by AIG Capital Services, Inc., Member FINRA, 21650 Oxnard Street, Suite 750, Woodland Hills, CA 91367-4997, 1-800-445-7862. Mutual funds are distributed by AIG Capital Services, Inc., Member FINRA. Harborside 5, 185 Hudson Street, Suite 3300, Jersey City, NJ 07311, 800-858-8850. AIG Capital Services, Inc. is a member of American International Group, Inc. (AIG).

W4882CBR (7/20)