When the unexpected is ‘normal’

Without any historical perspective we are susceptible to the primal reaction of fear

What is one of the top challenges faced by any fiduciary in an era of 24/7 news bombardment? The answer is reminding their clients of this critical fundamental fact: Most financial goals will take years of review, honing and attention. Such a patient mantra can seem archaic in a time of ever-declining attention spans.

In fact, most digitally connected human beings have passed a dubious milestone. According to a largely overlooked 2015 study commissioned by Microsoft, humans have regressed from a 12-second attention span to an eight-second attention span since 2000. Researchers found that goldfish have a greater attention span (nine seconds) than harried humans.

An ever-critical part of our mission is to understand the combined behavioral aspects of investing and human emotions and use our critical-thinking skills to steadily guide our clients through choppy waters. It is newsworthy that December 2018 was a brutal month for stocks (the worst month since 1931). And 2018 was, in total, the worst year in more than a decade. Yet, we are not in a Great Depression (1931) nor in a virtual collapse of the financial markets (2008). Bear markets happen, and so do bull markets.

Like it or not, we are all unwilling guinea pigs to the phenomenal impact that media “noise” can play with our emotional state of mind. A media environment, built and designed for short attention spans, is guaranteed to increase overall anxiety.

Without historical perspective, we are susceptible to the primal reaction of fear which feeds upon itself until flight feels like the safest bet. “The investor’s chief problem — even his worst enemy — is likely to be himself,” said Benjamin Graham, who authored “The Intelligent Investor,” one of the most widely read investment guides.

A mentor to Warren Buffet, Graham was a world-class market psychologist whose wisdom has grown in relevance and stature. With the combination of short attention spans, digital anxiety and the decline of financial literacy over the past several decades, it’s not hard to predict the corrosive effect this combination has on process-oriented decision-making.

A 2016 academic study, “Old Age and the Decline of Financial Literacy,” found this dichotomy: “The ability to answer basic financial questions decreases as respondents age, and this rate of decline almost exactly matches the gradual erosion of memory and problem-solving abilities later in life.” Yet, “older respondents didn’t report a loss of confidence in their ability to make financial decisions,” according to the findings by Texas Tech researchers.

Declining cognitive skills and increasing dogmatism in decision-making can be a financially lethal cocktail. Investors can also be lulled to believe that with previous decisions and their sense of entitlement that somehow the market owes them great success. But we can, and do, make better choices if we are psychologically self-aware.

Setting and working toward financial goals, readjusting those goals, and being aware of one’s changing risk tolerances can be powerful shields against the rising tides of market chaos.

In “The Intelligent Investor,” Graham shared the cautionary tale of Sir Isaac Newton and the South Sea Company investment bubble and bust in the early 1700s. Newton made a tidy profit when he rightly assessed that the South Sea bubble would burst, so he sold his stock. Unfortunately, he gave into the temptation and reinvested his profits before the bubble actually burst, losing the equivalent of millions of dollars. While Newton knew better, he was unable to discipline himself.

Unlike Newton’s era, we can now utilize digital tools for our clients to view how a disciplined long-range approach to financial planning can help them attain their goals while providing context to the long-term process. These tools offer different roadmaps and solutions for a wide range of income, asset diversity and risk scenarios in client portfolios.

We cannot fully eliminate risk, and cyclical markets are a fact of life. We can, however, give our clients an active role and stake in their own financial success, keep expectations real and clearly illustrate how expecting the unexpected is normal. Or, as Graham put it, “Investing isn’t beating others at their game. It’s about controlling yourself at your own game.”

Tom Sedoric is partner, executive managing director and wealth manager and D. Casey Snyder is partner, senior vice president and wealth manager at The Sedoric Group of Steward Partners in Portsmouth. They can be contacted at 603-427-8870 and thesedoricgroup.com.

Categories: Finance