- Investor behavior is the largest contributor to long-term portfolio underperformance.
- Emotional decision-making has cost investors $122 billion-plus over 20 years.
- Keep calm and carry on investing, regardless of emotional or political conditions.
While the so-called Trump Bump in the stock market has kicked many investors' returns into high gear, some financial advisors have clients who have been more interested in a Trump Dump.
Based solely on their dislike of President Donald Trump, these clients either have missed the recent market rally by selling off their stock holdings or have had to be talked off the ledge.
"Some clients want to make changes in their investment portfolio, but it's not really based on Trump's policies," said certified financial planner Tom Henske, partner at Lenox Advisors. "It's that they just don't like him. They are confusing Trump the person with Trump the economic policymaker."
The problem, advisors say, is that those investors are letting emotions drive their decisions, which studies show is anathema to good investment outcomes. Dalbar's 2016 Quantitative Analysis of Investor Behavior, for instance, shows that investor behavior is the largest contributor to underperformance over the long term, collectively costing investors more than $122 billion over a 20-year period.
From the Nov. 8 presidential election day through March 1, the — a broad measure of U.S. stock performance — climbed 12 percent.
Anyone who unloaded stocks after Trump's surprise election win missed that rally. And now, say advisors, for self-sidelined investors who want to get back into the market because they're enviously watching stock prices rise, there's no guarantee the upward march will continue unabated. Same goes for investors who love Trump and think the party will never end.
"Investing, or not investing, based on your emotions can really set you up for failure, or at least not doing as well over the long run as you would otherwise," said CFP Mitchell Kraus, partner at Capital Intelligence Associates.
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One of the biggest problems is the tendency for investors to follow the herd after a run-up in stock prices. As a result, they end up buying stocks at a premium, only to end up selling them at lower prices due to fear of them never going back up.
"The problem is that we've evolved well as emotional creatures, not rational ones," Kraus said. "But good investing requires people to set their emotions aside and act on a rational basis, which is not our instinct."
Kraus had a retired client call him around midnight on Election Night, panicked about her stock investments.
"We talked about making logical decisions, not emotional ones," Kraus said. He was able to help her through her fear, and modified her portfolio slightly to reflect her lowered tolerance for risk. But "no one can predict where the markets are going," he added. "My goal is to be right more often than I'm wrong."
Another client, however, decided to ignore Kraus' advice by moving entirely to cash after the election. And while the client has acknowledged missing out on gains worth well into the tens of thousands of dollars, she's now hesitant to get back into stocks, because her new fear is that the market is overvalued and on the verge of crashing.
Kraus and the client are working on a plan to dollar-cost-average her way back into the stocks. That is, spreading out stock purchases over time on a regular schedule regardless of price.
He also is discussing the idea of socially responsible investing with the client. "That way, even if Trump doesn't match her values, her investing will," Kraus said.
One of CFP Dana Anspach's clients had been buying diamonds with some of her cash, but then decided gold would be more useful if the economy implodes.
"I told [the client] that if she's really convinced things are going to be that terrible, invest in self-sufficiency," said Anspach, founder and CEO of Sensible Money. "Grow a garden and stock up on batteries, gas, guns and ammunition.
"Those types of things are likely to be more valuable than gold in an Armageddon situation," she added.
Eventually, Anspach said, the client realized that over-the-top anxiety about the future might be unwarranted, and agreed to leave her index funds alone but still is keeping a large portion of her portfolio in cash.
Financial advisors say they have seen similar emotional investment decisions in the past, too, as some clients ran from the market on fears of previous administrations or economic shocks. But the result was always the same: The market, even if it dropped, always went back up — and then some.
"Making emotion-based money decisions is not good for your wealth," Anspach said. "You really have to take a step back and know yourself, and know why you're making the decisions you are."
Fear among clients drives advisors to learn how to don a psychologist's hat and find a way to be sensitive to clients' views, but help them understand the pragmatic reasons for staying invested.
"When you can have an impact — when you can get people to make decisions that 99.9 percent of the time would be better than what they were thinking — it's very rewarding," Anspach said.
Henske, of Lenox, said that he spent his 20s getting every professional designation possible that related directly to his chosen career path, but a key component of his job wasn't covered.
"I should have taken communication and psychology classes, because half my time is spent stopping clients from doing things they shouldn't do," Henske said.
Advisors remind clients that long-term investing will include times when stocks dip, sometimes for lengthy periods. But at their core, stocks are shares of public companies whose primary goal is to make money.
"These companies will be successful because they have a profit motive," Henske said. "Unless that changes, why would anyone invested for the long term worry about who's in the White House?"
— By Sarah O'Brien, special to CNBC.com