Emotional Behavior and Investing

Emotional Behavior and Investing

IMG_7600“A Walk in the Woods” was released earlier this month. If you’ve read this column over the years, you know I have a fond appreciation for the Appalachian Trail (a.k.a. “the AT”). I often threaten to drag my wife out for a weeklong hiking extravaganza, surviving on nothing but nuts, berries and drinking water from cool mountain streams.

Nevertheless, we compromise and get the same experience on a day hike and picnic lunch. Whether you’re a day-hiker or a long-distance journeyman, hiking is an amazing adventure. I can walk the AT for hours and totally lose track of time and place. In a way, you enter into a trance with nature being captivated by the beauty and stunning vistas. Other times, you are startled awake by a snake or black bear.

A “Walk in the Woods” was a book written by Bill Bryson and is now a very entertaining movie. The original book by Bryson is worth the read; it’s a top 10 on my list. I’ve read a couple of his books; he has an awesome sense of humor and a natural wit and is magical storyteller.

In any case, Bill Bryson and his friend Stephen Katz hit the trail. In my opinion, the title implies a whimsical stroll through the forest. But these two travelers quickly find out the AT is no simple walk in the woods, rather a grueling, physically challenging hike. But, as Bryson, Katz and every “thru-hiker” knows, the real challenge is a mental one.

It’s kind of how you feel every time the market corrects; it becomes a grueling mental test that you can’t wait to end. There’s an amazing parallel that exist between hiking and investing: Anything can happen. During downturns I reflect on the quote by famous financial journalist Jason Zweig, “Anything is possible, and the unexpected is inevitable. Proceed accordingly.”

This summer has been a real volatile time for the market, and it officially hit “correction” status. As of Labor Day, the S&P 500 was down close to 7 percent. While there was a lot going on, the main cause for the market’s downturn was China and its surprise devaluation of its currency. China has been an engine of growth over the past decade. It’s logical for markets to get jittery when signs of China’s growth are slowing.

Domestically, the economic expansion may be weak, but it’s still improving. The recent revision to second-quarter gross domestic product (GDP) was revised upward from +2.3% to +3.7% with strength among many categories: consumer and government spending; trade; non-residential and residential investment.

In early September, the Federal Reserve’s Beige Book, which summarizes economic activity across the nation’s 12 Federal Reserve Districts, affirmed that overall business conditions have improved from July to mid-August. As to the various sectors covered in the Beige Book, manufacturing, retailing, nonfinancial services, and residential and commercial real estate are all improving.

On Sept. 17, the Fed left interest rates alone. Apparently, the job market and global concerns were the two main reasons for keeping rates the same for now.

As of this writing, the impact of the Federal Reserve’s actions coupled with the recent market volatility is hopefully not a signal of a domestic bear-market. With any luck, this recent correction goes into the record books as just that, a correction.

Regardless of global markets, the basics of successful investing remain the same: Watch expenses; stick to your long-term investment plan, maintaining a well-diversified portfolio that is lined up with your risk tolerance and investment timetable.

Now, back to the trail. You get to meet some really interesting folks walking on the AT. Last week, I met a couple hiking toward Georgia. The guy had walked 2,000 miles from Georgia, met a girl in Vermont who was heading in the opposite direction coming from Maine. Love-struck he started heading 2,000 miles back to Georgia to be with this girl. How’s that for a love story?

While love is rarely rational, and often emotional, investing should always be rational and never emotional. Unfortunately, emotional market corrections usually trump rationality. The markets are very efficient at taking money away from the emotional and giving it to the rational. My advice, proceed accordingly and go for a walk in the woods!

Bill Harris is a certified financial planner practitioner. He is a member of the board of directors for the Financial Planning Association of Massachusetts and an Ed Slott Elite IRA Advisor. He is a co-founder and principal of WH Cornerstone Investments in Duxbury and Kingston. Bill is passionate about empowering widows with their financial future and his award-winning email newsletter offers helpful advice and articles for widows looking to rebuild their financial and personal life. He can be reached at www.whcornerstone.com or 888-797-9009.

This article originally appeared in the Old Colony Memorial on October 4, 2015.

Helping widows rebuild their lives after the loss of a spouse. Love practicing yoga & golf. A connector. Strive to live by the Girl Scout Promise & Law.