Seriously. A dear friend of mine was unceremoniously dumped by her fiancée a few weeks ago. I am shocked. She is devastated. Not even a month ago they were disgustingly, giddily in love. It was like they were on some perpetual sugar high. Life was the picture of perfection. They were making plans. They were going to live happily ever after. What could ever go wrong? Now, I’ve been there. Who among us haven’t? You know the place. It’s euphoric!
THEN…out of (seemingly) nowhere, he comes over Saturday morning and simply says, “I don’t love you. I’m sorry.” WHAM! In a matter of seconds, she went from dreaming of Monique Luhillier , her Bergdorf registry day, and their Bali honeymoon, to having her heart shattered and her perfectly crafted future tossed into perpetual detour mode. I’ve been there. It totally stinks. She says it hurts so much she is giving up men for good, converting to Catholicism and joining a convent. I get it. When you’ve been burned like that, you don’t exactly go rushing back to stick your hand on the stove.
Anyway, I was checking on her earlier today as I was driving back from a lunch. After I hung up, Bloomberg radio was reporting on what was going on with the Dow. As seems typical these days, it was supposedly down because of something or other that someone or other said in Washington. Pure silliness. It made me think about how much investing is sometimes like falling in love. Don’t roll your eyes. I’m serious.
I can’t think of two things that are more emotional than love and money. Sometimes it is that emotion…that intrinsic connection… that causes people to make some pretty rotten decisions regarding both. Emotion can be blinding at times. I mean, how many of us REALLY REALLY wish we could bury those old sorority photos with the love of our 18 year-old life and his fantastic mullet? But if those photos didn’t exist, would we have those reminders of how truly blind love can be? Unfortunately, our blindness when it comes to money and investments can have substantially worse consequences than some sad memories and embarrassing pictures.
The patterns are remarkably similar. Depending on when you started saving and investing, you came in at different parts of the pattern. But let’s just say you started investing pretty recently (as in sometime in late 2003). You basically missed the “being dumped” market of the technology bust period that categorized the early 2000’s. With minor gyrations, the pattern was almost solidly up, up and up from late 2003 to the last quarter or so of 2007. The stock markets were doing well, domestically, among other developed nations, and among developing economies. Inflation was reasonable. Real Estate was soaring. It was, again, a state of euphoria. Investors got sloppy. In droves, they started doing things like consolidating their net worth in speculative real estate, overweighting stock holdings, no matter what their goals were, and then borrowing substantially to leverage a lifestyle a bit above their means. But, hey, what could go wrong? Emotion, not logic, ruled the day! When things were going so well, it felt so good that it was hard for investors to even fathom a time when they wouldn’t be.
Fast forward to the absolutely devastating last 15 months, or so, for most investors. It seems like out of nowhere, the bottom fell out and everything fell apart. I won’t rehash it here. We’ve all lived it. The fallout from our collective, emotional, amygdala highjack has manifested itself in different ways in all of our lives. Our sense of security, and in some cases, our plans for the future, have been jeopardized. Investors do not seem to know what to do and, again, are reacting on emotion.
Here’s the brilliant news. It doesn’t have to be this way. You can give your portfolio some emotional detox. The way to do it is by pure asset allocation and diversification. That absolutely does not mean having a few different stocks and bonds. Not even close. You need to have holdings spread among low correlated assets (in other words, investments that don’t really give a flip if the Dow is up or down if said investments do not involve large US based companies). You may need some stocks, some bonds, some real estate, possibly, some commodities, some cash, and maybe even some stuff that is a bit too sophisticated to get into here. The point is, you need to be able to have access to a broad variety of investments and create a long term plan. You should partner with an investment advisor that is knowledgeable about more than stocks, bonds and mutual funds. Together you need to draft a plan that is logical and tailored to your specific long term goals.
Most importantly, take emotion out of it. I have seen too many investors, go at it haphazardly during the feast of euphoria and then pull their money out of already down investments and scurry into low yielding cash with their tails between their legs during the rough times. For them, it’s all been about emotional, knee jerk reactions and the results, in too many cases, have been catastrophic.