There are two emotions that can derail an investment plan faster than a Nolan Ryan fastball: fear and greed. Fear and greed tend to push investors in the wrong direction at the wrong time. Let’s take a look at these two emotions and how they can impact your portfolio.
Fear is a great motivator, and it’s easy to find common examples today as it relates to investing. Simply turn on your TV and wait for the next commercial pushing gold and silver as a safe haven against the next great downturn.
Often a retired actor states that he will only trust his hard earned assets to gold. Well, the last two years have not been friendly for this investment strategy. Gold was near $1800 in the fall of 2012….today the price sits a little above $1300 per ounce. That’s a decline of over 25%! Doesn’t sound like much of a safe haven to me?
An investment strategy based on fear is flawed.
The market has been very strong for the last five years or so. Matter of fact, in the same period (two years) that gold prices fell greater than 25%, the S&P 500 rose over 45%. It’s tempting to slide towards the greedy side of the isle and dump all of your assets into the S&P 500. Wouldn’t it be great to see your money grow at such incredible rate of return?
The problem is, just like gold, there is no guarantee. You’ve heard that past performance is no guarantee of future performance…..and it’s true! Overloading in equities can be dangerous as well.
So what’s the answer? Simply put: it’s balance. When we let fear and/or greed drive our investment decisions we tend to take a divergent path to balance. Balance requires discipline. Think back to late 2008 and early 2009 when the market was tanking. Any decision based on fear would have been painful. Sticking to the plan and riding out the storm proved (once again) to be the prudent strategy.
We’ve recently seen market highs. We’ve seen solid performance from the market the last 5 years, so it may be tempting to over-weight equities based on past performance. Again, it’s important to remain balanced and not fall prey to fear and greed.
Implementing a balanced portfolio is not always an easy task to handle without professional assistance. Having someone to hold you accountable and pull you away from the temptations of fear and greed is a valuable asset! If you need help creating a balanced portfolio or you feel you are on the edge of making an investment decision based on fear or greed, The Alliance of Comprehensive Planners (ACP) is a great place to look for assistance.