Opinion: Harnessing greed, fear that roil markets to build long-term wealth

Opinion

Greed and fear often perch themselves on investors’ shoulders. Neither one is an angel whispering peaceful thoughts.

Rather, they’re like having a devil on either shoulder — though they do compete for control.

They’re so well-known and influential in the investment world, there are even indices and analyst metrics for them.

For example, there’s the VIX, the Chicago Board Options Exchange’s CBOE Volatility Index. It measures price volatility in the U.S. market. The more volatile the index, the more fearful investors are.

CNN also publishes a greed and fear barometer. Right now, it points to ‘greed’ but very close to ‘extreme greed.’

One year ago, the needle was pointing the other way: to fear. Heck, even a month ago, it was fear.

If anything, these two emotions make people, generally speaking, do bad things with their money, says Alan Fustey, a portfolio manager with Adaptive ETF in Winnipeg, division of Bellwether Investment Management Inc.

“Over the past 40 years of my career, I have seen people make such poor behavioural decisions,” he says. Some may have even had sound financial plans, but they cannot stick to it. Instead, they make rash money decisions driven by fear or greed that they come to regret.

Often people do the inverse of what they should do when it comes to investing, says Darren Coleman, portfolio manager with Raymond James in Toronto.

“People generally wind up doing the wrong thing at the wrong time,” says the host of Two Way Traffic podcast, which recently featured legendary active manager Larry Sarbit, who is based in Winnipeg.

“Everybody piles into the hottest investment after it’s been hot, and that’s usually when things go wrong.”

When markets are down, or falling, the urge is to sell when the right thing to do is to be buying because prices are down — essentially on sale, he adds.

A recent report illustrates this ‘S’ wave. It shows most investors buy high and sell low, and repeat.

The key to avoiding that is understanding the impact of these emotions on yourself and other investors. Having a financial plan and a diversified investment plan can help a lot with this.

“The way of getting past greed in fear depends on where you are: pre-retirement or post-retirement,” Fustey says.

For pre-retirement, get a good financial plan, have good asset allocation — the right amount of stocks, bonds and cash — to meet your risk tolerance, and rebalance that allocation on a regular basis.

“So you’re trimming from the profitable investments and adding to the assets that are down in value.”

For post-retirees, it’s not all that different, except for having a cash reserve of at least two years of expenses.

“If markets go down, you can ride it out and fund your expenses for the next few years and you’re not forced to sell in those down markets,” he says about the reserve’s importance.

Retired or not, rebalancing forces every investor — including professionals — to use the greed and fear of others to their advantage. It enforces selling high and buying low, and prevents them from doing the opposite.

“That’s why having a system is so helpful,” Coleman says. And if you don’t have one, look to an adviser or a robo-adviser to give you a system.

An adviser worth your money should spend a portion of their time preparing you to understand, recognize and manage these two emotions, says MaryAnn Kokan-Nyhof, a certified financial planner and manager at IG Wealth Management in Winnipeg.

“I spend a lot of time talking about planning, long-term time horizons and reviewing how markets work, so there is a lot of communication inevitably on the effects of greed and fear,” she says. “But every now and then I get an email from a client going, ‘I think it’s time to move to cash.’ I don’t email back; I pick up the phone.”

The conversation generally involves de-escalation, calming the client down, finding out what is worrying them and then reviewing their plan, discussing why it’s important to stick with it.

“It’s like, ‘Let this bit of news that’s worrying you pass us by, and instead focus on the long-term,’ and just that simple reminder usually works.”

That is, at least for treating fear.

Greed is a bit trickier, she adds.

“There are clients who are watching one investment go up and up” — and enjoying it tremendously.

“So when I am recommending it’s time to trim that position, they have a really hard time agreeing to do so because their emotions take over.”

Eventually, advice generally wins out. Yet, like everyone else, Kokan-Nyhof has heard plenty of stories about investors holding onto skyrocketing stocks that eventually fall back to earth, and they are on board for the entire voyage.

“Those people typically don’t have an adviser because a financial professional is the voice of sanity in the noise,” she says.

Having a plan is one thing, but getting help to build it will ensure it matches your situation well, Fustey says. Because if it’s ill-fitting, you’ll likely abandon it when markets punch you in the face — to paraphrase boxer Mike Tyson.

“You can be well-diversified; you can dollar cost average and you can rebalance, but if you panic and sell even one segment of your portfolio, it can all come back to bite you,” Fustey says.

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com