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Mad money and the fallacy of emotional investing

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So much attention among people in insurance and financial services is being placed on Dodd-Frank, the DOL’s fiduciary rule and the Affordable Care Act — and for good reason.

But have we taken our eye off the ball of potentially more damaging financial problems?

I’m talking about exposure to the market, emotional investing and the misguided belief in market timing.

Related: How to battle irrational financial behavior

Market watch

“I can tell you that when the bank stocks roar higher and are good investments, then commercial lending and economic expansion aren’t far behind,” — Jim Cramer, Mad Money, 2/15/17

On January 25, the Dow Jones industrial average did not roar past 20,000. After months or hovering around that elusive barrier, the Dow cleared the bar. It was a psychological relief more then an economic one, and vindication for the people who rushed out to buy DOW 20,000 hats

Where’s the ceiling? Or, better yet, where’s the floor? Stop me if this sounds familiar, but haven’t we seen a run up of the market before? I’m guessing many of you (and your clients) experienced the 2001 dot-com bubble and the 2007 housing bubble, which would lead to the 2008 financial crisis. Back in those go-go days, bank stocks and commercial lending were roaring as well. 

Oh, how long ago 2008 seems now. And how soon we forget.

Election night

In discussing emotional investing, I could talk about the tulip mania that swept through 17th century Europe, a time when a single Semper Augustus bulb traded for 12 acres of land. Instead, let’s look at a more recent event, election night.

The pollsters and pundits — the so-called experts — predicted a Clinton victory. The smart money guys on Wall Street followed suit. They baked a Clinton win into their investments. Whoops. 

Related: Clients’ emotional decisions give financial advisors angst

After an initial post-election panic, the markets bounced back. (Photo: AP Images)After an initial post-election panic, the markets bounced back. (Photo: AP Images)

When it became clear that Trump would take the needed 270 electoral votes, panic ensued. Emotions ran rampant. Financial markets plummeted in after-hours trading. The Dow dropped 650 points. The S&P 500 fell 4 percent. 

And then the markets snapped back. If the wolves of Wall Street want to live dangerously, so be it. But your clients — all those retirees? 

Time for a talk

Your clients hear the buzz going around, the opportunities out there. Maybe on the golf course or in their book club, one of their buddies is making a killing on a particular investment. Maybe.

Maybe Dodd-Frank and the DOL’s fiduciary rule are bad for your business. But you know what’s good for your business? Market euphoria, market volatility, global uncertainty — mad money.

You guys aren’t in the mad money business. You’re in the safe money business, and there’s never been a better time than right now to sit down with every client you have and help them develop a plan that will keep their money safe.

See also:

The personality trait that predicts financial health

The advisor as therapist…

What “everybody knows” is not always right

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