consumer finance, Emotional Intelligence, EQ, finance, financial advice, financial markets, financial planning, individual investing, individual investors, investing, investing information, investment advice, investments, investors, personal finance
Navigating the complicated world of investing can seem very intimidating and so frustrating. There are so many pieces of information coming from the financial media that seem to conflict with each other. At times it seems as though the markets move up or down for no apparent reason. What is an investor to do? Well, one of the most important things to do is to work on your emotional intelligence (EQ). Most people assume that you need to have an extremely high IQ to navigate the financial markets. Now it doesn’t hurt to have a lot of intelligence, but it arguably more imperative to have a high EQ. EQ, in its simplest terms as it relates to investing, is the ability to control one’s emotions during market volatility. Extreme market moves either up or down tend to make investors act irrationally or in a panicked way. Instead of the old saying of “buy low and sell high”, they do the exact opposite and “sell low and buy high”. Therefore, I wanted to share two steps to help you utilize and develop your EQ to allow you to be a more successful investor. You will note that the two steps are more akin to practices and definitely interrelated.
Step 1 – Learn how to ignore the “noise” about the financial markets on a daily, weekly, and even monthly basis at times.
What does “noise” mean in this context? “Noise” relates to all the reporting by the financial media and market prognosticators about the short-term direction of the financial markets. Every day you will hear market “experts” (money managers, economists, traders, CEOs, etc.) predict with a good deal of confidence that the markets will start to rise, start to fall, or stay unchanged. How do these discussions with plenty of evidence and thought help you? Well, every investor (even a novice) should notice something right away. You know that these are the only three outcomes for the market to begin with. It really does not help to hear the conflicting opinions on a daily basis. Note that each day at least someone is saying one of the three outcomes for the financial markets.
Who should you believe? What should you believe? Now here is an important note about guest appearances that have had recent accurate predictions about the direction of the stock market. The financial news networks will rarely bring on a guest that has been totally wrong and advised clients quite poorly in the recent past. It is not advisable for either party to make the guest look bad. What is the point here? There is a bias when listening to a guest appearing on a news network because only the ones whose predictions came to fruition are brought back and asked for more ideas. The moderator never points out the times when that same guest has been wrong in the past. Thus, it can seem like every returning guest has the best possible advice to follow as it relates to investing. Moreover, you should adjust your portfolio as he/she suggests. Do not get caught in that trap!
The main point and reason for step one is that the sources for investing tend to be conflicting and seeming as though the individual investor must act right now. There are actually very few times when the financial markets reach a point of inflection that truly warrants your attention. For example, the October 1987 stock market crash, the 1994 bond crisis, the Asian contagion in 1997-1998, the Dot Com Bubble in the 1990’s that started to burst in April 2001, and the financial crisis of 2008-2009 most recently are events that individual investors should read about and learn what is happening. Although I will though that the difficult part is knowing in real-time what these events are. Hindsight is always 20/20 as they say.
For additional information, I strongly recommend that you read a blog post I posted a while back. The discussion goes into far greater detail on this subject and will help you understand the nuances far better. The link to this blog post is as follows:
After all the discussion above, what is the practice investors should develop? Well, as difficult as it might be and foreign, I encourage/implore you to stop listening to financial news networks and reading financial newspapers (or Internet columns) on a daily or weekly basis. Why? Just as a simple truism, it is the easiest way not to succumb to the financial “noise”. If you are not exposed to it, you will not act (or feel as though you have to act) on a regular basis. I promise that as you use this technique you will become much more comfortable. Your EQ will really start to develop and become more mature. Now I am not recommending that you give up all together on the financial media and sources of information. Individual investors should simply consult them less often. Looking at summaries of monthly activity will give you a much more complete picture of what is going on in the financial markets.
Step 2 – Commit to Examining Your Brokerage Account Statements on a Quarterly Basis Only.
I will admit that this practice, and change in behavior, is the hardest for individual investors. However, effective adherence to step one is only possible by following this recommendation. Many individual investors look at their account balances on a weekly or even daily basis. The financial markets can move up and down quite frequently in the short term. If you constantly look at your portfolio, your EQ will be hard to control or even melt away.
The vast majority of individual investors have a long-term financial plan. You should have determined your risk tolerance (how much market volatility you are comfortable with), set up an investment portfolio with exposure to different asset classes like stocks and bonds, and determined what financial goals you have for the future already. By definition the plan is long term and should not be altered all the time. Note that you will utilize your IQ to establish your investment portfolio and then harness your EQ to stick with it through the inevitable “bumps” in the road. If you are only exposed to your account balance four times per year, you will be far more likely to make more rational decisions. Investing is very emotional due to the fact that money is involved. That is true and will never change. With that being said, individual investors will have less chances to be affected by emotions using this practice; only four times per year.
What should an individual investor do each quarter? The quarterly brokerage account statements should be examined every March, June, September, and December. Take a look at the account balance as a whole and then how the different components of your investment portfolio performed. Then open up the other two brokerage account statements in the quarter to simply see what the account balances were. For example, if it was the first quarter, you would be opening January and February after you looked at March. Now the important thing to remember is that only your terminal balance matters. What does that mean? It is merely a fancy way of saying that only the amount of money you have at the end of the quarter is important. The manner in which your brokerage account balance got to be at the end of the quarter might be interesting to look at, but, at the end of the day, it does not mean much at all. It is in the past.
These two steps will definitely assist you in becoming a more successful investor. Note that I did not say a trader or speculator. Investors by definition have a long-term orientation. Traders and speculators deal in hours, days, weeks, or even minutes. Individual investors should be focused on quarters, years, and even longer increments if a solid and well thought out financial plan is in place.
The decision and ways to reallocate one’s investment portfolio is a separate issue. Over the course of time, it will become necessary to alter the exposure of an investor’s investment portfolio to different asset classes, sectors, or regions. Those decisions involve the IQ again but having a well formed EQ will assist greatly in that exercise. I will take a detailed look at account rebalancing in the next series of blog posts.