By Roger Nusbaum
Anyone who has read my blog for any length of time may recall my active involvement with the local volunteer fire department where I live in Northern Arizona. Occasionally my work in the investment industry intersects with some aspect of firefighting, and one such intersection just occurred last week.
Like many firefighters I am an EMT. EMTs are on a two year cycle where they must accumulate 48 hours of continuing education and go through a 24 hour refresher class. Earlier this month, I took the refresher with two other firefighters from our department.
The process turned out to be far more involved than we realized. Essentially, we crammed the entire EMT semester (the class people take when they first become an EMT) into three days of classroom time and then took the same final exam required after that semester-long class.
Going into the final, one of my colleagues kept saying "please just let me pass the test" in a sort of half prayer, half bargaining tone of voice. As soon as he passed his test, his immediate reaction was to be disappointed with his score.
This sort of behavioral pattern of course pops up in investing on a regular basis. Many people desperate just to get back to even in late 2008 were then frustrated because their equity portfolio was only up 20% last year.
In both examples people quickly forgot what it felt like to, in these examples, be afraid of not passing or be down a lot in their portfolio (down a lot is intentionally vague because of the subjective nature of the phrase).
In these instances, advisors must themselves remember that these behavioral swings are very normal and they need to be ready to confront them effectively when they arise. One effective way to do this is through preemptive communication like an occasional reminder while equity prices are high that markets will at some point go down again, and when markets are down, remind them that they have gone down before and then recover. The cycle repeats.
This is of course equally true for investors who manage their own portfolio. They are susceptible to the same emotions and biases as anyone else.
We all have moments where our ability to act completely rationally is impaired. It is part of the human condition. The key is to not let yourself or your clients be done in by a temporary absence of reason.
Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com. The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.