Can avoiding financial soothsayers be emotionally rewarding?
From time to time, a few of my financial planning clients want to follow a specific stock or investment. This is often something that is getting a lot of attention in the media: alternative energy, maybe, or cryptocurrency or a new technology. They might reserve a little bit from their diversified investment portfolio in order to play with this particular investment. I typically give somebody about two years before they have proven to themselves that they can’t really do any better picking stocks than just following an index.
What I’ve come to understand is that the wish to invest actively in this way is often an emotional need to be active, to do something. Because good long-term investing is really boring. It requires quite a lot of doing nothing.
And doing nothing can create anxiety, because that is not our societal money script. Much of the financial press tends to encourage us to stay involved, to pay attention to the economy and the ups and downs of the stock market. Research, on the other hand, suggests that making good asset allocation choices, then only checking on your investments once a year or so, is a better long-term approach.
That inner anxiety and need to “do something” can make investors vulnerable to gurus who predict the future and seem positive about what is to come. Over the years I’ve seen many instances of clients panicking about the future because of warnings by “experts” that this, that, or the other thing was going to tank the economy and send us all over the edge of a fiscal cliff. Typically my approach has been to gently challenge the positiveness of the expert’s absolute knowing, often helping people not make drastic moves in their portfolios. Probably nine out of 10 times, the right action was not taking what they were so convinced would be the right action.
So it was embarrassing a couple of years ago when the “expert” making a strong prediction was me. In May of 2020, the devastation of the financial pandemic was just unfolding and real estate activity was just going in the tank. House sales had declined 18% from March to April, then went down another 10% in May. I wrote some advice that suggested if you’re looking for a house, it would probably be best to wait. The economy is shutting down just as it did in 2009; house prices are likely to fall maybe five to 10 to 25%; this is really predictable.
I really had no second thoughts about that prediction. I became a real estate broker at the age of 19; I had extensive training as well as experience in real estate; I’ve held the highest professional designations in both commercial and residential real estate. I am certainly qualified as an expert in real estate.
And with that particular prediction, I completely blew it. Any first-time home buyers that listened to my bit of advice cost themselves a bundle by not buying immediately when things were falling apart. Since then, real estate prices have increased dramatically.
Because of my experience and expertise, this did not seem like a risky prediction. It turned out to be an epic miss. To be fair, I wasn’t exactly alone.
Economists couldn’t predict the sharp upward trend in real estate prices; real estate agents didn’t predict it; home builders didn’t predict it. This pandemic run up in housing prices was not logical. It was based on emotions. So I might excuse myself a bit because I was not alone, but the whole point is I was wrong. And I was wrong for all the right reasons. I think it’s important that people like me who give financial advice need to acknowledge when they blow it.
This was a good reminder that markets are emotional. It made total logical sense that one could expect the real estate market to decline. Yet the markets responded to human emotion—which probably included fear around the pandemic, political divisions that prompted relocations, and much more.
On the surface, it’s illogical that markets are driven so much by emotion. Yet the fact that emotion does drive all markets is inherently logical. Think of it this way: given that human emotion drives the markets, then it’s totally logical that accurately predicting future market prices is impossible. So it’s completely illogical to try and predict future prices based on logic, because what drives markets is unpredictable human behavior.
Why do we even want to be able to predict the future? Why do we want to rely on someone to “know” what will happen and tell us what to do? It comes down to anxiety. The fear of not knowing can be overwhelming. This is true for many decisions, not just financial ones. The challenge is learning to sit with the anxiety, learning to befriend the anxiety without doing anything to relieve it. Doing something is an attempt to relieve anxiety from without, when it can only be relieved from within.
I don’t mean to say that the right answer, the right way to relieve anxiety, is always to do nothing. This is the wisdom of the Serenity Prayer, asking for help to accept the things I can’t change, to change the things I can, and to gain the wisdom to know the difference. Sitting with and exploring the anxiety can help us gain that wisdom.
Next time that you’re feeling a lot of anxiety around a decision, before you do something about it, take time to drill down and ask yourself, “What’s the belief driving this anxiety?” When you uncover the money script, do a little research to find out if it’s true. Sometimes you can look at that belief and instantly recognize it as the partial truth it is. Because we all have a part of us that’s pretty wise. The more you practice trusting that part of yourself, the less need you will feel to rely blindly on the predictions of experts.
Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.
