From the Bottom of the Bucket

          “Blinded by the Light”

I have not addressed any financial observations in this blog (so far), because I have tried to help people focus on the underlying behavioral motivators that influence decision making in general, but around financial matters specifically.  A sound foundation in this area will provide a solid defense during turbulent times, which are a part of the cyclical nature of life.

But alas, we humans have short memories and strong emotions.  I was in the advisory business in 1987, when the stock market dropped 22% in one  day !!

 

 I was also advising clients in 2002 when the market returned -22% and 2008 where the return was -37%.  These similar crashes brought fear and anxiety to everyone. I witnessed firsthand, how normally thoughtful people, were overcome  with apprehension and did impulsive things that were not supportive of their life plans.

We are now entering the eighth year of the current bull market, which has seen U.S. equity indexes double.  It is so easy to get “blinded by the light” of buoyancy during these “good” times. Your account statements showing ever growing balances and the fear emotions fade from your memory.  For those of us in the advisory business, these times represent a difficult challenge.  We have to remind our clients that there will be another market downturn. and that large market rallies are mathematically the same as market downturns, both being extremes.

The problem is that people don’t experience the emotions in a bull market the way they do in a bear market.  Behavioral experts have studied this phenomenon and found that people feel the pain of loss three times as much as the joy of gain!  In short, loss avoidance is a much more powerful motivator.  In a strong bull market (like the one we are in now), people get their account statements (which are always up) and mentally assume that money is “theirs” and any decrease is processed as a loss.  This, of course, is flawed thinking, as your gain or loss can only be calculated when you sell the asset.

Now we have a set of warning signs that the blissful investor is not paying attention to.  I am not going to list those (since that would take up another entire post), but suffice it to say that they are pointing to a cyclical downturn.  Are you emotionally prepared?  If you have not yet diversified your Vigor resources, perhaps now is the time to do so.  Being well rounded helps you keep things in perspective, a strong antidote for impulsive reactions to negative events.  The balanced approach that I am proposing helps you keep your course, even when the stormy conditions try to alter your direction.

Until next month, I wish you fulfillment.

Bob