In recent years, the concept of mindfulness is everywhere. It’s clear that in our increasingly busy world, many people are searching for a way to pause, reflect, and be more present in the moment. We saw a quote the other day that made us think about how important this concept is when it comes to finance and investing.
Psychologist Viktor E. Frankl is often credited with saying, “Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.”
This idea of mindfully “choosing a response” rather than just reacting immediately is something we talk about with investors every day. Even though most people try to be thoughtful about spending, saving, and investing, sometimes their natural tendencies lead to knee-jerk behaviors that can be harmful in the long run.
The Behavior Gap
Carl Richard, CERTIFIED FINANCIAL PLANNER™ professional and creator of the Sketch Guy column in the New York Times, is credited with coining the term “behavior gap” to explain this phenomenon, which can lead investors to overcomplicate financial decisions. Carl uses simple sketches to distill complex financial concepts. One of our favorites plays on the classic investing tenet of “buying low and selling high.” His sketch illustrates the “behavior gap” — even though most investors know buying at a market high or selling at a low is a bad idea, fear and greed can often drive undesirable behaviors.
Long-Term Financial Focus
What if instead of reacting from a place of greed or fear, you created space to reflect, think, and ultimately choose your response? Working with a qualified financial professional to develop a long-term plan can help you do just that. CERTIFIED FINANCIAL PLANNER™ professionals have a fiduciary obligation to make decisions and recommendations in the best interest of their clients. Sometimes, this means having tough conversations that keep emotions in check and ensure clients remain aligned with the plan designed specifically for them. These conversations create the space to make prudent decisions rather than impulsive reactions.
Over the long term, this can be very helpful to investors. According to Dalbar, the nation’s leading investor behavior study, investment returns and investor returns are almost always different. In a 2018 study, Dalbar found due to investors’ behavior and poor timing, “the average investor underperformed the S&P 500 in both good times and bad.”1 Investors who make long-term investment decisions based on short-term market movements and “noise,” rather than sticking to a long-term investment plan, should expect continued underperformance and greater heartache along the way.
We all know how hard it can be to avoid letting our emotions dictate our behaviors. But it is essential, especially when it comes to investing. So, the next time you see a stimulus like noise in the markets or a short-term return play, try to create space for yourself to really think through the ramifications of your response. Hopefully, that will lead you back to the path of a long-term focus on growth and financial freedom.
1 Average Investor blown away by market turmoil in 2018 — Dalbar’s Quantitative Analysis of Investor Behavior Study (QAIB)
Important Disclosure Information:
Different types of investments involve varying degrees of risk, including the risk of loss of your entire investment. Past performance is not indicative of future results. CPWM and its employees can give no assurance that the performance of any specific investment recommendation or investment strategy discussed herein, whether directly or indirectly, will be profitable, or that it will be equal to any historical performance level discussed herein. The discussion or information contained herein is not intended to be, and should not be deemed as, personalized investment advice. The recommendations made may not be suitable for your specific individual situation and we encourage you to discuss with your financial professional before undertaking any investment strategy or recommendation contained herein. The discussions contained in this blog is current only as of the date hereof and may change due to a number of factors, including varying market conditions.