Client's Corner: The Most Painful Emotion in Investing Sample 2025
[This essay is typical of the pieces I make available to newsletter subscribers most months, in pdf format, for direct transmittal to clients, though not in newsletters or any websites, which would open these essays up to the non-subscribing world. I retain the copyright, which must be cited. PLEASE NOTE THAT THE INCLUSION OF THIS ESSAY IN THIS SAMPLE ISSUE IS FOR ILLUSTRATIVE PURPOSES ONLY; NON-SUBSCRIBERS MAY NOT SEND IT ON TO ANYONE, WHICH WOULD CONSTITUTE COPYRIGHT INFRINGEMENT.]
October 2024
A very fine wealth manager of my acquaintance recently shared with me how (and why) he places tremendous emphasis on warning his clients to keep their view of politics entirely separate from their long-term investment policy.
It seems that one of his best clients—and a dear personal friend—could not be dissuaded from liquidating his substantial equity investment portfolio in the run-up to the 2020 election. He professed his intention to get back in “when the smoke clears.” But, despite my colleague's reasoning from all of history—combined with a heartfelt personal plea—the investor just could not bring himself to ride it out.
I think you sense where this must be going. The day after Election Day, the S&P 500 closed at 3,443. As my friend and I spoke, it was 5,400. But that isn't the tragedy. The tragedy, of course, is that the investor is still in cash. And in agony.
Escaping political turmoil is just one variation on a larger general theme: frightened by upsetting current events—and anticipating or reacting to market declines—many people who have years and decades of investing yet to do flee the equity market. Indeed, it's only human: our whole nervous system is wired to run from perceived danger—even if it hasn't happened yet, but even more so when it seems to be enveloping us.
People are always capable of ginning up a rationale of sorts, based on alarmist financial media reports and dire forecasts of even worse things to come. (“This time it's different.”) But the plain human fact is that they're just trying to make the pain stop. And for a relatively little while, it does. They feel a rush of relief that they've escaped from the chaos, that their capital is now “safe.”
Then the (historically) inevitable happens. The economic or financial crisis that seemed so insoluble somehow gets ameliorated over time. The equity market bottoms, as more and more investors correctly perceive enhanced value in the lower prices. Successful companies resume innovating (indeed, many never stopped). Their earnings begin to recover. With increasing earnings, companies are able to raise their dividends. And the gradual advance of their share prices—a process that's in fact been going on for the investor's whole life—begins anew.
For a relatively little while, the investor still sitting in cash is able to convince himself that the market recovery will stall—there just has to be a pullback, doesn't there?—affording him a chance to get back in advantageously. The irony is that on occasion there actually is a pullback—but to nowhere near the low levels at which the investor sold. (Unless, of course, the pullback doesn't happen at all.) Unable emotionally to accept his mistake, learn from it and move on, he remains—like my friend's client during these last four years—in cash. And in unrelenting regret.
Granted, this view of the cycle is derived from the totality of economic and market history. And granted, as every prospectus says somewhere, “Past performance is no guarantee of future results.” Granted, finally, that there are no facts about the future, meaning that absolutely nothing contained in this little essay is to be taken as a prediction.
I don't minimize the stress and the fear we all experience during episodes of significant market turmoil. You literally wouldn't be human if you didn't feel these emotions. What I hope to remind you is that you always have the ability—surely with your advisor's earnest encouragement—not to act on the fear.
Intense as it may be, the emotional relief that attends upon going to cash has always proven to be fleeting. By far the most painful emotion in investing—because it never ends—is long-term regret.
© October 2024 Nick Murray. All rights reserved. Used by permission.