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
Consider stabilizing concerns when the market is falling. Selling at this time may affect your financial outcome.
NEW BULL MARKET
BEAR MARKET
BULL MARKET
Consider easing excitement when the market is on an up-swing. Buying at the top may not benefit your retirement goals.
Source: 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.
Indecision
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 over 4% over the last 30 years!
1
Consider the importance of a long-term perspective. Over time, a steady investment approach generally outperforms strategies that rely on impulse buying and market timing.
10.70%
6.24%
S&P 500® Index
Average Equity Fund Investor
Annualized returns, 1990-2020
!
AVOIDING THE TRAP
Over 4%
A performance gap of
Source: 2021 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
2
BEST Performing Asset Class
(Ranked by annual return and year)
WORST Performing Asset Class
+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
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!
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.
3
Consider easing back into equities with an automatic investment strategy such as Dollar Cost Averaging (DCA).
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.
Mar 2000 30 Months
Bull markets and subsequent bull runs
Source: FactSet, NBER, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management. *A bear market is defined as a 20% or more decline from the previous market high. The related market return is the peak to trough return over the cycle. Bear and bull returns are price returns. J.P. Morgan Asset Management Guide to the Markets – U.S. Data are as of December 31, 2020.
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.
Recent Bear Markets*
Recent Bull Markets
Market Peak
Bear Return
Oct 2007 17 Months
Tech bubble/ .com bust
Global financial crisis
-57%
-49%
............................................................
Oct 2002 60 Months
Mar 2009 141 Months
401%
101%
Market Peak: Duration:
Start Date: Duration:
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 the stock market would have increased to $2,110,716, outpacing bonds and cash by more than $1.5 million.
4
Stay calm and maintain your long-term focus. Your financial professional can help you put current market conditions into perspective. Please remember past performance is not indicative of future results.
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, 2021.
Stocks $2,110,716
Stocks have historically outperformed bonds and cash over time
Hypothetical growth of $100,000 over 30 years, 1990-2020
Bonds $552,690
Cash $220,835
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.
5
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, 2021. 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. Assumes: taxes paid monthly, reinvestment of income and no transaction costs. 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. Indices are unmanaged and cannot be invested in directly. Past performance is not a guarantee of future result.
10.3%
Stocks
Bonds
Cash may not provide the growth potential necessary to achieve your retirement goals!
Real rates of return after taxes and inflation, 1926-2020
Cash
5.3%
5.7%
0.7%
3.3%
-0.8%
Returns after taxes & inflation
Returns before taxes & inflation
Team up with your financial professional to build a disciplined investment strategy that can help you avoid costly emotional mistakes!
W4882CBR.1 (5/21)
Annuities issued by American General Life Insurance Company (AGL), Houston, TX. Certain annuities issued by The Variable Annuity Life Insurance Company (VALIC), Houston, TX, except in New York. In New York, annuities issued by The United States Life Insurance Company in the City of New York (US Life). Variable annuities are distributed by AIG Capital Services, Inc. (ACS), Member FINRA, 21650 Oxnard Street, Suite 750, Woodland Hills, CA 91367-4997, 1-800-445-7862. AIG Life & Retirement is part of American International Group, Inc. (AIG). It includes Individual Retirement, Group Retirement, Life Insurance and Institutional Markets, as well as issuing companies AGL, VALIC and US Life. ACS is a member of AIG.
