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Understand Your Investing Behavior

Sheyna Steiner, Investing Behavior

With Sheyna Steiner, investing analyst/writer for Bankrate.com

Most of us think of an analyst as someone who treats emotional issues, perhaps delving back into a patient’s childhood in an effort to bring clarity to a debilitating neurosis in the hopes of changing destructive behavior.

Sheyna Steiner is an investing analyst and writer for Bankrate.com. and as such analyzes why people react the way they do to the ebb and flow of the stock market. Money is unquestionably tied to our emotions, and the fear of losing that money can often lead us to make bad decisions, based on a false set of premises.

The market goes down for a while and we think, “Oh, this is the way it will always be, I’d better sell, head to the hills.”  Then the market goes up and the reverse kicks in, “Things are so good and they’ll probably stay that way. I’m going to be brave and I go heavy into stocks.” These are frightening behaviors. Getting a grip on impulsive reactions is imperative if you’re invested or thinking about investing in the market.

Sheyna cautions against watching pundits on TV during a market downturn or even reading too many financial prognostications in the print media because there’s danger in allowing panic to set in. A steady plan will always prevail

Of course, a person’s age will greatly determine the best investment strategy and provide insight into their investing behavior patterns.  A retiree or someone heading toward retirement will want to be in the safety zone with stocks, for the most part, since there is a shorter amount of time to recoup losses.  Millennials, on the other hand, who have decades to allow for growth, should be comfortable with some riskier assets, letting compound interest do its job for them. Oddly enough, a recent study has shown most millennials acting in the opposite manner: they have twice as much money allocated to cash and cash equivalents as do older investors. Perhaps this is a consequence of their having come of age during the financial crises of 2008.

The market is not a stagnant entity—it goes up, it goes down. It always has and always will. Each investor has to determine how much volatility and risk they can afford and that they can stomach. It’s always smart to consult a qualified investment advisor who can determine the best program for any individual situation and mindset.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: Life is full of risks, crossing the streets can dicey, driving is unquestionably perilous, and nearly everything you eat may cause cancer, or a heart disease, or something terrible.  Yet we bravely engage in these potentially life threatening behaviors on a daily basis with barely a thought.  When it comes to taking stock market risk, the average investor can act utterly terrified and unable to make any sort of rational decision.

Let’s take a look at why this happens and what you can do about it so you stop making the same mistakes over and over again.  I have Sheyna Steiner with me today from bankrate.com; she’s going to help me hash out these issues.  Welcome back, Sheyna.

Sheyna Steiner: Thank you very much, Steve.

Steve Pomeranz: People make common mistakes because of the way our brains are wired.  They flee stock investments when the market starts to decline.  They sell low and lock in their losses forever.  What are some of these behaviors that people tend to act on, and let’s talk about what they can do to help counteract them.

Sheyna Steiner: Okay. Well, behavioral finance researchers have identified some ways that people think that makes them make these rush decisions about their money.  One of them is called a recency bias.  Whatever happened yesterday, some people think, “Well, that’s the way things are going to be forever.” When things are going really well, people get in the mindset of, “Okay, things are going to be good for a while, or tomorrow, or forever.” Then when things are really bad, they start thinking, “Okay, now things are going to be bad forever.  I need to adjust my plan accordingly.”

As we know things aren’t bad or good forever.  The stock market is going to go up and it’s going to go down.  It’s simply the way it works.  What you have to do is take a level of risk that is commensurate with your time frame and also the amount of risk that you can stomach on a day to day basis.  If the stock market going down 20 percent is going to descend you into a panic then you don’t want to take as much stock market risk.

Steve Pomeranz: At least, if you are a saver and you can control the amount of volatility to some degree, to a fairly large degree then you can go out into the investment world and get better returns than you’re getting on savings and still be within the framework of what you can stand with regards to the volatility.  I think that’s important.  It’s an emotional reaction, it’s feeling sick to your stomach, it’s worrying too much that the fact that the value of your accounts has gone down.  There is an old saying in Wall Street that trees don’t grow to the sky.  Things don’t go forever and neither do companies whose prices drop.  If you have one company and the price drops because their business is bad and you look at the balance sheet and it’s a total mess.  Or they have been lying and whatever and the company goes out of business, yes, that is dangerous, that’s a permanent loss.

If you own the S&P 500, 500 blue chip companies and their prices on average go down, that’s not going out of business.  That’s just the fluctuation on the downside of the value of their stuff.  Knowing that can help you to just relax a little bit and take it in stride.

Sheyna Steiner: Exactly.

Steve Pomeranz: What about watching TV during bad markets?  Do you think not watching TV or listening to excitable radio shows about what the stock market is doing, avoiding those, is it a good practice as well?

Sheyna Steiner: It is, especially if you’re going to be swayed by any advice you hear on the radio or on TV because you’re going to be reacting to things that have already happened.  You should have a financial plan in place that you’re going to stick with pretty much no matter what.  You don’t want to be constantly reacting to things that happened in the short term.  That’s just going to make you rack up trading fees, maybe income taxes.  There are a lot of reasons to just avoid it if you are going to feel upset by the news.

Steve Pomeranz: John Bogle says the Wall Street has a phrase, “Just don’t stand there, do something,” right?  Bogle says, “No, just do something, stand there.”

Sheyna Steiner: Exactly, you know it’s so true, it’s really true.  One thing that’s important is people need to kind off rethink their ideas about risk.  Short term stock market risk is not actually that scary if you look at it with a long term view.  Investing too conservatively can actually be a little bit more risky for people who have a long time frame to invest.  Now, you may end up short changing yourself when you get to retirement.  You won’t have the amount of money that you should have had if you’d invested more aggressively.

Steve Pomeranz: Yeah, we have this group of people who have been taught their whole life.  Savings to them means putting your money in the bank, or maybe if you venture out a little bit further than that, you get a CD, or maybe you buy some treasury bills or something like that.  When you look at the returns—and this is no news to anybody, so I won’t spend a lot time on it—when you look at the returns, they are so small.  Then you subtract out inflation, you subtract out taxes, and basically you’re probably ending up with a negative real rate of return.  That’s not going to get you anywhere in the future.  As a matter of fact, you’re going to be losing your ability to live the life you want to live if you’re stuck in these kinds of investments.

Sheyna Steiner: Exactly, that’s a really good point.  Bonds and fixed income that’s meant to have done really well over the past 30 years, but today’s interest rate environment— and for a long time in the future probably—those kind of investments aren’t going to yield the way they have in the past.  Investors definitely need to re-think their ideas about saving and investing.

Steve Pomeranz: I was looking at a chart the other day that showed the annual returns of the stock market since 1980.  They had the bars going up and down, and 26 out of the 34 bars were positive; they were on the north side of the line.  The remaining were on the south side of the line.  What was really interesting is they added in a dot which showed the average drop from the high point that year to the low point that year.  When you looked at that average drop, the average was about 14.4%.

Overtime, if you have this number in your head that let’s you round it up to 15%, you own a basket of stocks you can expect in any given year, on average, for that basket to go down from its peak that year to its low that year of an average of 15%.  Once you know that and then you look at the actual rate of return over that period of time, which was something over 10%, you get the feel of how this works.  What the cost is, nothing comes for nothing.  You always have to pay something, and, in this case, you’re paying with this idea of uncertainty and volatility.

Sheyna Steiner: Exactly, it’s something that you do have to expect, it is the way it works.  What’s interesting is that over a long period of time that volatility will be tempered just simply by the long period time.  If you only have five years, or seven years, you may not want to take as much stock risk because if it does go down, and you need your money, you’re not going to be able to recoup those losses.

Steve Pomeranz: Here is something that worries me, there was an article in bankrate.com, and by the way my guest is Sheyna Steiner with bankrate.com.  Talking about a survey of millennials and what their thoughts are about the stock market.  First of all, who is this group the millennials?

Sheyna Steiner: Those are people between the ages of 21 and 36 years old.

Steve Pomeranz: Okay, they seem to have really been affected by the volatility in the stock market, and they have a propensity to put their money into savings, am I right about that?

Sheyna Steiner: That is exactly right.  There have been several surveys that have shown that, but the most recent one I read was the UBS Investor Watch.  In tests, millennials, do you know how much money they have invested in various asset classes?… and it turned out that that group of investors has twice as much money allocated to cash and cash equivalents than older investors do.  That’s kind of backward; they should really be investing a lot more aggressively because they have a lot longer to leave their money in the market.  Let that compound interest work and retire with a decent nest egg.

Steve Pomeranz: It is ironic because the younger investor—just as you said so well—really needs to get into stocks, needs to get into risky assets, and just kind of then forget about them and let them do their thing.  As a matter of fact, you gave some examples in the article.  If you invested $10,000 in 1964, looking at the S&P composite index, it would be worth over a million dollars today.  There is no way that any kind of a savings account would have given you that kind of return.  Let me go on: 10,000 invested 25 years later in 1989 would be worth over 107,000 today;  10,000 invested in 2004 would be worth nearly 20,000 today, almost  double.  For kicks, if you just invested one dollar all the way back to 1872, it would be worth over 160,000 today.  That’s just one dollar has multiplied 160,000 times.

Sheyna Steiner: Yeah, it’s pretty powerful.  I know that it’s fun to look when you see…you might go back and say, “What would happen if I invested $100 at Microsoft or Apple and then you go back and say, “Why didn’t I buy that?’” You can just put money into a broad market index and leave it there for the span of your career and you might end up with similar chart for yourself.

Steve Pomeranz: What’s very cool, too, is that Bankrate has this new calculator. It’s called historical returns investing calculator, and it’s for free on the bankrate.com site.  You put in an amount and you put in the date.  Then you put in whatever other date, maybe it’s today’s date. And it will tell you what that amount would be worth had you invested it in the S&P composite index and reinvested the dividends.  What kind of wealth you would have generated.  It’s a lot of fun; you can go through different periods of time and see how things had worked.

Sheyna Steiner: Yes, thank you for mentioning that.  It is a fun calculator.  It’s really interesting; it can show you what timing the market can lead to, which is not good things, to whatjust leaving their money to work in compound would do.

Steve Pomeranz: Okay, so the lesson here is that, unfortunately, buy and hold is boring and trading into market is exciting, but buy and hold is better for a long periods of time.  My guest is Sheyna Steiner at bankrate.com, Thanks for spending sometime with us, Sheyna.

Sheyna Steiner: Thank you.