- Many of us follow our instincts, even when it comes to managing our investments. That can be a dangerous and costly investment strategy.
- Today, Dr. Joel Wade explains when you should – and shouldn’t – trust your gut.
Virtually every investor has a “gut feeling” about the market. And gut feelings – as we all know – are hard to ignore.
For example, your gut may be telling you that the economy is firing on all cylinders, that the market is in a pronounced uptrend and that stocks are likely to go substantially higher from here.
Or it may be sending the opposite message. It may be telling you that valuations are too high, that this record-long American economic expansion will end soon and that stocks are about to go off a cliff.
As a licensed psychotherapist with decades of experience, I’d advise you to be skeptical of your gut… particularly when the stakes are high.
If you believe that you should trust your gut always, what you’re really saying is that you should trust your emotions always, and that can be a dangerous belief to hold.
When it comes to investments, in fact, it can be a disaster.
In October 1987, I was on a four-week adventure with a group of friends, driving across the Tibetan Plateau. We were in the middle of nowhere, before cellphones. No internet or communication of any kind was available anywhere.
That’s when Black Monday hit – the stock market crash of 1987.
We did have a radio, so we knew what had happened. One of my friends had his entire fortune invested in the market, and he could tell enough from the news reports that he may have lost everything.
He was scared and deeply troubled.
When we reached our hotel in the capital city of Lhasa a few weeks later, he was finally able to contact his broker.
At this point, that meant doing nothing.
It turned out that being in the middle of nowhere for several weeks was a godsend for him. Because by the time he could actually do anything, his investments had largely rebounded and he knew he was going to be okay, disaster averted.
Had he been able to act on his emotions and communicate with his broker when the fear hit him and everything in his gut told him to sell, he would’ve likely sold at the very bottom and lost everything.
His emotions would have been his worst possible guide.
Hope and fear often arise from what we think is going to happen in the future. Do I think I’m going to be in danger? That will bring anxiety. Do I think there will be great opportunities? That will bring excitement.
But we need to confirm what we feel with objective data and analysis – and a clear view of our long-term objectives.
You may feel that your gut has served you well in the past in certain circumstances. But if you’re honest with yourself, it has almost certainly not been your best investment guide. Few of us have genuine contrarian instincts.
When we trust our gut for everything, we’re throwing the dice with our future.
I can trust my gut somewhat when working with my clients, because I’ve been doing it very successfully for nearly 40 years. But hand me the controls to a jet aircraft, and my gut would have zero chance of piloting a safe landing.
A big problem with blindly trusting our emotions is that the most volatile ones, such as fear and anger, can be the most seductive.
Mastery of your emotions comes from having an epiphany, from realizing that blindly following your emotions is a dangerous practice. It might take help or coaching over time to establish solid new habits, to learn to deal with situations rationally rather than justifying irrational behavior with our emotions.
Don’t get me wrong – it’s natural to feel afraid sometimes.
But if I give my fear a place of honor among my experiences – avoiding situations where I feel anxious, accepting that when I feel afraid it means there’s danger I must avoid – then I’ll tend to feel afraid more often, and I’ll craft my life around avoiding whatever I might find anxiety producing.
If we bring this approach to our investments… fear can overcome our better judgment.
Our emotions are an essential part of our humanity. They help give our lives meaning.
At their best, they can provide us with immediate and powerful information that might save our lives or steer us toward something wonderful.
But investment success is about following the right principles, not following the right emotions. Understand this. Make sure your investment decisions are rational rather than emotional. And reap the financial rewards.