I was talking with a potential client recently and he said to me “I’ve got a feeling December will be a good month in the market, how do you feel?”. This is the crux of a big problem investors have to overcome, taking feelings out of the investment decision process. This is true for all investors, including the pros of many years who work on Wall Street.
What possible effect could feelings have on the quality or predictability of investments? The answer is none. And getting that emotion out of the investment decision process is one of the most difficult things to do. Because we’re dealing with powerful emotions. Greed and fear, the sense of vindication or humiliation, excitement and depression. I believe that emotion was a major factor in the internet bubble in the late 1990’s. It was the sense that people could do no wrong, and the excitement of all that potential that made investors, professional and amateur alike, lose their reason.
There is only one place that emotion has in investment decisions, and that’s a very broad one. It has to do with risk. If a person is often feeling sick to their stomach and can’t sleep because of their investments, then they are possibly taking on too much risk. If on the other hand the investor is upset because the markets are moving when they are earning a very modest return on their savings account, possibly they are taking on too little risk.
But those are the only places for feelings and hunches in the investment world. Beyond that, if an investor feels a little sick because their stocks are down, or elation because they are up, the smartest thing that investor can do is just ignore it.