The problem, advisors say, is that those investors are letting emotions drive their decisions, which studies show is anathema to good investment outcomes. Dalbar’s 2016 Quantitative Analysis of Investor Behavior, for instance, shows that investor behavior is the largest contributor to underperformance over the long term, collectively costing investors more than $122 billion over a 20-year period.
From the Nov. 8 presidential election day through March 1, the Standard & Poor’s 500 Index — a broad measure of U.S. stock performance — climbed 12 percent.
Anyone who unloaded stocks after Trump’s surprise election win missed that rally. And now, say advisors, for self-sidelined investors who want to get back into the market because they’re enviously watching stock prices rise, there’s no guarantee the upward march will continue unabated. Same goes for investors who love Trump and think the party will never end.
“Investing, or not investing, based on your emotions can really set you up for failure, or at least not doing as well over the long run as you would otherwise,” said CFP Mitchell Kraus, partner at Capital Intelligence Associates.
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One of the biggest problems is the tendency for investors to follow the herd after a run-up in stock prices. As a result, they end up buying stocks at a premium, only to end up selling them at lower prices due to fear of them never going back up.
“The problem is that we’ve evolved well as emotional creatures, not rational ones,” Kraus said. “But good investing requires people to set their emotions aside and act on a rational basis, which is not our instinct.”
Kraus had a retired client call him around midnight on Election Night, panicked about her stock investments.
“We talked about making logical decisions, not emotional ones,” Kraus said. He was able to help her through her fear, and modified her portfolio slightly to reflect her lowered tolerance for risk. But “no one can predict where the markets are going,” he added. “My goal is to be right more often than I’m wrong.”
Another client, however, decided to ignore Kraus’ advice by moving entirely to cash after the election. And while the client has acknowledged missing out on gains worth well into the tens of thousands of dollars, she’s now hesitant to get back into stocks, because her new fear is that the market is overvalued and on the verge of crashing.