Don’t be a Stereotype: Resist the Many human Investing impulses

Investing is often compared to heart-racing situations, from riding rollercoasters to gambling; however, even amid environments whereby risks seem amplified, foresight and partnering with trusted advisers aid in tempering extreme emotions that trigger potentially destructive behaviors.

Consistently Inconsistent

Hiley Hunt Wealth Management Partner and co-founder Andrew Hunt prefers the age-old quote from Ben Graham (the “father of value investing”): “In the short run, the market is like a voting machine, tallying up which firms are popular and unpopular. But, in the long run, the market is like a weighing machine, assessing the substance of a company.”

“Stock prices are a leading indicator of what investors expect to happen in the future,” Hunt explained. “On occasion, reality does not line up with expectations, which may cause the stock prices to eventually adjust to a level more in line with the new reality.”

During the pandemic’s wild markets, he continued, it seemed stocks went up because sufficiently big groups agreed to buy them. So, some investors new to the market thought “investing” was trying to catch the next wave of investor sentiment.

“In recent days, we have seen this play out to reveal that those stocks which ran up to extreme highs due to this enthusiasm of a mob, have since seen a major correction back down to prices that reflect the reality of their actual circumstances,” Hunt said.

Citing Schwab Center for Financial Research insights dating back to 1926 (available at, Hunt noted that successful investing is an outcome of not trying to time the market. Instead, success is associated with accumulating time invested in the market.

“Short-term investment prices may vary wildly due to investor expectations,” Hunt said. “Over the long term, as reality reveals itself, investment volatility tends to smooth out and performance becomes more stable.

“Selling on a hunch that the market is at a high point may sometimes be accurate, but the real trick comes in determining when to get back into the market.”

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Hunt has seen investors “sell,” but fail to “buy back in” due to fear or because the market has run way up and “it must be high again.”

“Trying to time the market is a trap,” Hunt summed up.

Foster Group Lead Investor-Business Development Ross Polking spoke to the “herd mentality” that exists among new investors – an overwhelming pressure to “pick the hot stock.” For others, the misconception exists that returns are somehow “static.”

“People will enter the market stating they are looking for a certain percentage return per year,” he said. “The only way to lock into a particular return every year is to purchase a product, not invest in equities. The stock market is consistently inconsistent.”

Additionally, investors may believe money is lost if the portfolio’s value drops.

“This only happens if an investor sells those declining assets at a loss,” Polking stated.

“Patience is a critical virtue when investing.”

Similarly, investors must consider data and academic evidence.

“Pictures are especially powerful,” he said. “When you look at history and showcase the success of globally diversified, long-term market performance versus an active management approach, the numbers can be fairly convincing.”

Polking said Foster Group leans on how the best portfolios are those that investors stick with for the long term, regardless of market volatility.

“Planning before portfolio construction allows us to best determine what the investments need to do,” he said. “Without any planning-based goals providing context to portfolio construction, there will be consistent angst to do more and chase returns.”

Benefit from Experience

Chief Portfolio Strategist Sean A. Lynch of Harrison Financial Services said individuals worry they are “too late” or “too early” to invest. The former tendency reflects the belief that, “With equity markets near all-time highs, how can the stock market go higher? If I missed out, I don’t want to jump now.” The latter tendency reflects cash flow, “How much should I invest and how do I get started?”

“The biggest step a new investor can take is the first step,” he said. “Open an account and systematically invest a portion of money that shouldn’t impact your lifestyle.”

Furthermore, just because equity markets are near “all-time highs,” Lynch said it’s important for new and seasoned investors to review their portfolios and ensure they aren’t taking on more risk than desired in certain investment areas. Stay invested according to one’s long-term plan.

“Over the past year, we have experienced COVID, inflation hitting a 40-year high, the recent Ukrainian invasion and uncertainty around the Fed,” he said. “It is OK to have some liquidity, but the key is to stay invested. Making changes within your asset allocation and risk parameters should be reviewed on a consistent basis with your investment provider.”

Lynch indicated many investors have gotten better at resisting the temptation to time the market. But, he said, some investors hold too much cash, believing a correction is imminent or they like the safety that cash brings.

“We work with clients to make sure they have a comfortable amount of liquidity (cash) available, but for some clients that ‘sleep well at night,’ cash is a much larger percentage of assets than others,” he said. “Higher inflation in 2021 and 2022 is resulting in many of these clients looking to deploy some of their cash. A 7.5% inflation rate quickly devalues cash investments.”

Citing a social media post the firm published this year, Lynch emphasized what matters isn’t what the market does. But what you do in response.

“In times of panic, that is hopefully where all the previous work done on your financial and investment plan leads to comfort,” he said. “We expect markets to be much more volatile in 2022 with the backdrop of higher inflation and the prospect for the Fed to raise interest rates.”
While tactical moves may be made around volatility, he added if the proper portfolio for the client’s plan has been built, they are not likely to panic or make irrational moves.

“Some investors also have a narrow view of what is the market,” he said. “Investors may have concentration risk, which historically would reflect too much of a single stock. In today’s world, investors may have too much of a certain part of the equity market — too much in growth stocks, too much in tech stocks, too much in crypto.”

So, Lynch said, when investors are concentrated in a certain area and that area falls it usually results in panicked, irrational decisions.

Bringing the conversation around, EverGreen Capital Management Senior Vice President and Wealth Manager Earl J. Johnson indicated new investors tend to compare investing to gambling, likely due to the risks involved; however, new investors tend to miss that “investing usually involves taking a stake or buying shares in a company.”

“As a shareholder, an investor is looking to benefit in the success of a company by way of the company’s ability to be profitable on behalf of all of its investors,” he said. “All investments (unlike gambling) do not have to be speculative in nature as companies offer financial reports that attempt to reveal the overall financial health and prospects for a company to be profitable.”

Johnson further characterized attempting to “time the market” as “acting on emotion.” He said it’s very hard to subvert that tendency.

“Many investors who invest with the prospect to make money on a short-term basis will watch the market and usually worry about the natural short-term fluctuation of their investments,” he explained. “This ‘emotional rollercoaster’ typically promotes a desire to act with the intention to make money or save money.

“Ignoring the basic tenets of ‘buy low and sell high,’ many investors get caught in a vicious cycle that finds themselves on the wrong side of buying low and selling high, as they tend to lean toward selling when investments fall, and buying when investments are doing well.”

Embrace Best Practices

Hunt of Hiley Hunt Wealth Management referred to investors having a clearly-defined plan to stay the course when markets fall, which typically means working with advisers to create a portfolio that uses investments with different correlations to each other.

“So, when, not if, markets fall, not all the investments are falling to the same degree,” he said. “I call this investment plan our ‘playbook’ … when the market falls, I can remind our clients of the playbook and our plan for this exact circumstance.”

He stated it is essential to develop the playbook in “normal times,” when everyone is clear-eyed and rational. He also described the present time as “interesting.”

“Traditional investments, such as bonds, no longer perform the way that they did in the past due to the current interest rate environment,” he said. “This has led investors and their advisers on a search for new options for lower volatility, but higher potential performance investments.”

In turn, Hunt referred to the rise of “hedged equity” or “known outcome” alternative investment products.

“Companies like JP Morgan have offered this solution for years,” he said. “But new players are emerging in the space such as innovator [exchange-traded funds]. These companies and many more are developing interesting potential solutions to the low-yield bond environment.”

Since he described the underlying elements of these investments as “quite complex,” folks should engage with respective advisers to learn more.

Foster Group’s Polking emphasizes that cash and emergency funds must be in “ample supply” before anything else.

“Beyond that, there’s no immediate reason to go outside of what’s perceived as ‘normal,’ – normal and boring work really well,” he said.

And, if one does go outside of such boundaries, understand risk and reward are related.
“Costs tend to increase with alternative investing approaches,” he said. “Do not put more at risk than you are willing to lose.”

Real investments were characterized as intriguing; Polking noted exposure to income-generating hard assets can be a “fantastic diversifier.”

“But, again, [they] can add substantial risk if not done in a calculated way,” he said. “One consideration is to delve into real estate investment trusts. These investment vehicles provide exposure to this asset class without concentrated risks nor property management responsibilities.”

Going forward, Polking said legislative changes, including those related to Roth conversions or backdoor Roth contributions, remain up-in-the-air and potentially on the chopping block.

“401(k) savings limits have been increased for 2022,” he said. “Investors who have been maximizing their contributions in the past need to be sure they increase their deferral amounts this year.”

Harrison Financial’s Lynch, too, referred to “real assets,” which include real estate and commodities.

“At current market conditions, we are positioning a portion of clients assets in broad-based commodities across agricultural, industrial, and precious metal commodities,” he said. “We believe this gives our clients better diversification and total return possibilities rather than doing a pure play in a single commodity like silver or gold.”

At the federal level, Lynch also highlighted the rise in contribution levels for most qualified retirement vehicles (i.e., 401(k)s and IRAs).

“This does not happen every year and this year’s increases were large,” he said. “Investors should take advantage of the higher limits. Estate tax and gift tax exemptions were also increased.”

EverGreen Capital Management’s Johnson suggested adopting an investment philosophy that sets parameters for performance. Rebalance investments once those objectives are reached to, as he puts it, “mitigate the anxiety that comes with timing the markets.”

Account for risk tolerance, investment timeline and taxes when buying and selling.

On the horizon, Johnson added, the most impactful changes are likely Secure 2.0 – the follow-up to the Securing a Strong Retirement Act of 2021 – notably characterized by the increase in required minimum distribution (RMD) age.

“The age will increase from the current age of 72 to age 75 in 2032,” he said. “In addition to the increase in age to 75 in calendar years after 2031, the act also exempts RMDS for account holders with balances of $100, 000 or less.”

He said the act features many enhancements; for instance, tax credits for employers with employer-sponsored retirement plans, provisions for employers to offer incentives to employees who participate in company retirement plans, and reduced “service period requirements,” which allow for long-term, part-time employees to participate.

“It allows for an increase to catch-up provisions to $10,000 (in 2023 for some participants), in addition to expanded opportunities for automatic plan enrollment, which will help with the problem of retirement savings as, according to most statistics, less than half of Americans have retirement savings accounts,” Johnson said.