Emotions, Healthy Tension and Other Investment Advice

What a long strange trip the equity markets have been in 2018!  The all-time equity highs of September seem only a distant memory.  Mid Term elections, economic uncertainty, and global trade concerns all fed a global sell-off.  Bonds have also had a very rough year, with the Barclay’s Aggregate Bond index returning a negative 4% year-to-date (YTD).  The timing was perfect for our panel discussion held on November 8, two days after the mid-term elections.  We had a great turn out, our guests found it very informative, and our industry professionals did a great job.  If you weren’t able to make it, here are some of the highlights.  

We began with a quick discussion of “real assets”.  One of the more interesting comments that came from Mike Miller with Versus Capital was that 50% of our country’s economy is concentrated in only 20 metropolitan areas.  The accompanying color-coded map of the US looked surprisingly similar to another US map we had previously seen from a political analyst presenting the current political divide in our country.  That was as close as we got to any political discussion.  Mike’s point was that growth trends in population and urbanization underlie demand for “real assets”.

Dr. Scott Quatro was full of energy as he led us in an engaging discussion of behavioral psychology.  Did we just used the word engaging to describe behavioral psychology?  Scott argued that once-successful companies like GE and Sears are struggling or even failing because they lost sight of their purpose.  Having a clear and concise purpose—captured in a description of its mission, vision, and values—might have helped those companies manage through their problems more successfully.  He then applied the idea of purpose to individuals and their money.  Without a plan, people often make poor financial decisions.  So point no. 1 is have a plan.  But he also argued that a good plan must incorporate our emotions, because people’s behavior with money is often driven more by emotion than by logic, whether for good or bad.  In our process of getting to know our clients and developing a financial plan, we like to uncover these often overlooked emotional drivers and “plan for them”.  Recognizing and addressing a client’s emotional behaviors during the development process also helps clients feel more comfortable with the resulting plan. 

Our next presenter, Devin Velnosky, applied behavioral psychology directly to the world of investing.  From his interaction with clients as a portfolio construction specialist with Janus Henderson, he sees that most people think about investing as a series of isolated, short-term events rather than as a part of a long-term plan.  Devin explained how emotions pull on investors during financially trying times to undermine a well-constructed portfolio.  One of Devin’s more memorable slides compared the ending value of two investments in the S&P 500 index over the past 19 years.  The one that was continually invested was twice the size of the one that missed just the 10 best days over that same period.  Since the best performing days often occur during some of the most troubled economic periods, deviating from an investment strategy could significantly cut into your overall returns.  Devin concluded that the perfect portfolio is one where the investor feels comfortable with the “healthy tension” that exists between emotional and intellectual drivers. 

Our last speaker, Chris Wilson, CFA, did not disappoint with his discussion of the here and now.  As a fixed income portfolio manager with Voya Investment Management, he and the team at Voya feel comfortable with the economy in 2019, believing that the US Federal Reserve will respect markets and limit its future rate hikes.  Their prediction for 2020 was different: conditions could be in place for the “R” word (recession) to appear.  Noticing the unease in the room, Chris was quick to point out that he was talking about a “normal” recession, and that we should not expect another 2008, which was anything but normal.  Regardless, we are listening.

As our long strange investing trip for 2018 winds down, here is our take away from the panel.  There are “real” real asset investing opportunities.  It is critical to have a plan that addresses emotional drivers not just the intellectual ones.  Clients need to realize there will always be a “healthy tension” when investing.  And finally, be cautiously optimistic for in 2019 but pay close attention and be mindful of 2020.  Thanks for the “heads up”, Chris. 

We very much appreciated everyone who attended and we look forward to seeing everyone at future events.