“Zen-like awareness allows us to run with the bulls and hide from the bears” – Zen and the Art of Risk Management

Financial professionals are often tasked with managing their clients’ psychological preconceptions as it relates to their portfolio.  This has been especially true over the past couple of years with heightened economic, market and political uncertainty.  

Looking back to the Spring & Summer of 2020, this time provided a prime example of emotions in conflict.  Stock prices were surging higher despite double-digit unemployment and closures of large economic segments.  It was not easy to feel bullish as the pandemic continued to spread and job losses mounted.  These corresponding feelings of fear and greed have often been detrimental to investors.

Looking forward, these emotions may push investors to make the wrong decisions at the wrong time.  The Financial Advisor needs to understand these subconscious forces.

When bull markets are roaring, extreme optimism makes the siren song of even higher prices hard to ignore.  At market peaks, investors fail to appreciate risk and instead follow the bullish crowd.  This herd mentality and FOMO (fear of missing out)  can cause a risk miscalculation as we become so focused on rewards without seeking the rationality behind it.

While these greedy tendencies can be dangerous, focusing too heavily on prior market declines is also problematic.  There is no golden rule that says markets must correct when they are too expensive.  Valuations may sometimes seem elevated but strong future earnings can make those valuations appropriate.  Solely focusing on what can go wrong may prevent compounding your wealth. Sitting on the sidelines during a market run up can mean missing outsized returns, which can help alleviate down periods and make risk management a little easier.

As important as it is to think for ourselves, we must understand our psychological makeup.   A solid understanding of a market’s technical and fundamental backings provides the tools to fend off the urges of fear and greed, providing an equation for long-term investment Zen. 

Cheers!    – Steve H