From Emotional to Rational in 45 Minutes
August 12, 2010DATELINE: November 2008
Participants: Myself and a loving family member
ISSUE: Wanted to sell out of the stock market
MISSION: To turn a emotional decision into a well thought out one (rational)
In my workshops to clients and also in one on one discussions, I am often asked how investors get through the inevitable market declines. I would usually describe the tenet of taking time to assess a situation before making a decision, or in other words taking the emotion out of the equation. Sounds easier to say than it is to do. That is why I now use an example of a wonderful family member who, unbeknownst to them, has provided me a real life example of moving from an emotional decision to one devoid of emotion. Here’s what happened:
During a particularly turbulent market decline (November 2008), my phone rings and on the line is the family member I’m speaking of, my Dad. Now Dad is a very bright guy with a great grasp of the market and understands the concept of risk/reward better than a lot of people. On this fateful day however, the first words that I heard from him were: “We need to get out of the market.” This type of statement when not addressed immediately often leads to the subsequent emotional selling of investments. Now what I needed to do with my Dad was to turn an emotional reaction to a steep market slide into a rational, well thought out decision. So here is what I did:
We looked at what the value of all their stock holdings would be if they sold that day. I then added in realistic values for the equity in their home as well as some options that were also vested. In essence, I looked at all available resources that they could use to enjoy their retirement lifestyle. I then assigned a very low rate of return to that total amount so that I could get an annual income figure. Now this is where the rubber meets the road. One of the biggest principles in retirement planning is to minimize risk as you approach retirement. So we definitely were running a scenario that minimized market risk.
So great, I ran a hypothetical situation to come up with an annual income figure. My Dad now had to answer the question, will that amount be enough to (a) let them live the retirement lifestyle they want and (b) will it be enough to last both their lifetimes? And the answer was……………………………………
YES! They could afford to not be in stocks. And yes, they did sell the majority of their stock holdings. Why not all you ask? Remember, my Dad is astute and once we went through the scenario of not being in the market, he now came back to rational decision making and part of that decision making was factoring in not just market risk but also inflation risk. Now THAT’S a rational decision.