During his inauguration speech, Franklin D. Roosevelt left us with these famous words, “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” So, what does Franklin D. Roosevelt’s speech have to do with today, you might ask? A decade’s worth of behavioral finance studies suggests that his words are more than just an echo from a dark time in our distant past. In fact, they may be what we need to hear today.
We know from years of studying financial behaviors that many of our personal economic decisions are driven by either pleasure or fear. And, unfortunately, pleasure and fear are not equally weighted. In fact, investors are four times more likely to act on fear. And we are in danger of watching fear win out in today’s market environment.
What does a fearful decision look like, you might wonder? The most common choice includes, but is not limited to, timing the market. Meaning you are convinced that cash is safer than the market; therefore, you move all your assets to cash or CDs when the market slides downward. Or you buy that annuity product based on a perfectly timed sales pitch. You are convinced it will “cost” you nothing. And the annuity eliminates all your downside risk while giving you all the upside potential. Sound familiar? If either of those two resonates with you, you aren’t alone.
Understand that cash and annuities have a purpose in an overall plan. However, they are tools put in place well before market volatility arrives. Remember, flighting into cash is only half the decision. You also have to time when to get back in. And annuities often need serious scrutiny before entering a well-designed financial plan.
Many practitioners of financial planning understand the power of fear and how it leads otherwise intelligent and well-intentioned investors to make poor decisions. Research from Dalbar, Inc., a company that studies investor behavior and analyzes investor market returns, consistently shows that the average investor earns between 50% to 75% less than the overall market over time. Average investors are individuals who do not work with a dedicated advisory team, and often adjust their portfolios during positive and negative market conditions.
Average investors often lose focus on their objectives and give up on their process, not keeping the disciplines they put in place. A great visual representation of this can be found in a quote from the famed economist Gene Fama. He said, “Your money is like a bar of soap. The more you handle it, the less you’ll have.”
Gene is right; those investors who obtain the highest probability of success are the investors who stick to their plans and put in the hard work up front. Having a detailed plan that fits your needs eliminates fear’s sting. Contact the Financial Enhancement Group when you are ready to start reducing financial regrets.
The Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.