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Improving Investor Behavior – Investing in Panic

A lot can change in 30 days. One short month ago, markets were knocking on the door of all-time highs, businesses were doing well, and Joe Biden was behind several candidates in the Democratic primaries.

Oh, how things change quickly. Very quickly.

Even when compared to historic drops, the decline of about 18 percent that we’ve seen in the broad market indices took only 13 days. The start of the Great Depression took 28 days to reach that level. In 1998, it took 31 days. The Great Recession didn’t even make it in the top five fastest drops.

I want to focus on two questions in this column: First, to what can this speed of this market drop be attributed; and second, is it warranted?

All dramas need a villain. This time it’s the Coronavirus. The rapid spread of the virus led to ghost towns (Wuhan), which in turn led to locking down an entire country (Italy). This is a serious virus, and any amount of death or damage caused by it is too much. I don’t intend to trivialize it, nor the efforts of healthcare workers around the world fighting on the front lines.

But as investors, we have a mandate to try and understand where to draw the line between reasonable concern and emotion-driven panic. Too much emotion leads to panic selling, which in turn creates opportunities for those willing to buy when others are fearful.

I’d argue that we are well over the line of reasonable concern and deep into an emotional panic. During the 2008-2009 recession, corporate profits declined 46 percent, according to Brian Wesbury, Chief Economist at First Trust. Comparably, the current declines point to an estimated profit decline of 50-80 percent. Effectively, the market is saying that Coronavirus will have a greater effect on American businesses than the Great Recession, a time in which the entire monetary system seemed to be teetering on edge.

Consider these five critical elements of an economy: The Federal Reserve, taxes, regulatory policy, trade policy, and spending. What’s the status of these? The Federal Reserve just announced yet another cut to rates last week, making them even more accommodative than they already were. We just passed significant tax reform two years ago. Burdensome regulatory policies have been reduced. Trade policies (while challenging) have shown progress. All that to say that our economy is a pretty good place for business right now, and far better than it was during 2008-2009.

If the economy is strong and unemployment continues to be at an all-time low of 3.5 percent, why is there such a panic? I think part of it is the unknown. We’ve seen movies and TV shows designed to scare us with viruses. A disease that demolishes populations, creates zombies and generally wreaks havoc. We’re seeing something we don’t fully understand, and governments around the globe are reacting. Social media posts are encouraging everyone to start wearing gas masks and stockpiling toilet paper. Media, both traditional and social, perpetuates panic with continuous updates from a variety of “experts.” Couple that with the financial industries’ recent trend of eliminating trading costs and arming investors with phone apps, and you start to understand how easy it is for investors to panic sell with virtually no barriers.

On February 3, some 12,000 Robin Hood (a “free trading” app) investors bought Tesla shares for the first time. It reminds me of Bitcoin in 2017 and the dot.com bubble of 1999. Greed is a powerful emotion. When prices decline, human nature extrapolates that values will go to zero. Fear overtakes common sense, rising to panic.

Going one level deeper, consider a popular investment these days called exchange-traded funds (ETFs). These derivatives are designed to mirror the performance of a basket of underlying assets, usually stocks. For example, this allows an investor to buy a share of an ETF that reflects the performance of the entire S&P 500. Investors like them as they provide a low-cost method of diversification.

But behind the scenes, there’s a lot of trading going on to keep the derivative in line with the underlying asset. This gets complicated quickly, but suffice it to say that I think ETFs may be contributing to the dramatic swings we’ve seen lately. Liquidity, options, and other derivatives drive big moves, and these funds utilize tons of them. Computer-driven buying and selling mean it can all happen in a moment’s notice. I think the very financial instrument that was designed to give investors an edge has increased volatility and speculation.

Even when armed with logic and facts, our emotions can still get the better of us. There’s no doubt that headlines are scary, and the market drops are meaningful. But logic has to win over emotion. Think about this: during the Apollo 13 mission of 1970, the moon landing turned bad when two oxygen tanks and two fuel tanks failed. According to Jack Swigert, the chief pilot on the mission, had those variables been thrown at them during the simulator drills, they would have responded, “Come on, you are not realistic.” No one could have seen this coming, but it happened. One month ago this whole scenario seemed impossible, but here we are.

It’s during times like these we are reminded of the importance of good investor, and indeed financial, behavior. Get back to basics: Do you have a financial plan? Do you have savings? Do you have a project account set aside for emergencies? Are you spending less than you make? Are your investments diversified?

If all these boxes are checked, good investors will look at moments like these as opportunities. Asset prices have declined, allowing us to purchase some of the best companies in the world at discounts unimaginable only 30 days ago.

Steve Booren

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Forbes Top Wealth Advisor in Colorado.

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Improving Investor Behavior – Campbell’s Soup & Rising Income

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This article originally appeared in the Denver Post, February 16th, 2020.

Cold winter weather means it is soup season here in Colorado, and none feel more familiar than Campbell’s Tomato Soup. Just the name conjures a familiar aroma, a warmth in your chest.

Campbell’s feels familiar because it’s been an American icon for more than a century. Introduced in 1898, Campbell’s tomato soup is an excellent benchmark for understanding the impact of the persistent enemy of all investors: inflation. For more than 100 years, the size hasn’t changed, but the price sure has. About 45 years ago, in 1974, the soup cost about $0.12 per can. Today, it retails for about $0.87 per can. That points to an average inflation rate of 4.3 percent.

Forty-five years may sound like a long time, but that’s about the length of a typical retirement. Read more

Steve Booren

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Forbes Top Wealth Advisor in Colorado.

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Improving Investor Behavior: The Sharp Knife of Compound Interest

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This article originally appeared in the Denver Post, October 27th, 2019.

Anyone who has ever spent time outdoors understands and appreciates the value of a sharp knife. Whether stripping wood to start a fire, using it as a cooking utensil, cleaning a fish, or for any of a million other purposes, the trusty knife is an essential tool. But knives also have inherent danger as well. Used the wrong way, a knife can quickly put an end to a fun camping trip, or worse – a life.

With this in mind, let’s consider compound interest. For those who don’t understand the concept, compound interest is money earned on money spent or saved, typically expressed as a percentage. If you have a savings account, you’ve earned interest (albeit a tiny amount). This interest is compounded (i.e., multiplied) when the amount is left alone over a period of time.

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Steve Booren

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Forbes Top Wealth Advisor in Colorado.

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Improving Investor Behavior: The Price of Time

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This article originally appeared in the Denver Post, September 15th, 2019.

In previous articles, we’ve discussed time as our most valuable asset. With only 1,440 minutes per day, how we choose to spend our time and where we focus our attention deserves the same rigorous budgeting that managing money does, perhaps even more so. Money is a resource; there can always be more of it. But time is finite, and there is no getting it back once it’s gone… or is there?

There’s a well-known quote by American author H. Jackson Brown that goes, “Don’t say you don’t have enough time. You have exactly the same number of hours per day that were given to Helen Keller, Pasteur, Michelangelo, Mother Teresa, Leonardo da Vinci, Thomas Jefferson, and Albert Einstein.”

But I want to challenge the notion that we all have the same amount of time each day. Think about it like this: I doubt Michelangelo had to mow his yard. I bet Thomas Jefferson didn’t spend much time in traffic. And when Einstein showed up to the restaurant, they probably made a table available for him. Read more

Steve Booren

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Forbes Top Wealth Advisor in Colorado.

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Improving Investor Behavior: Mind Your “Owned” Businesses

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This article originally appeared in the Denver Post, August 18th, 2019.

What is Google worth? Most finance people would look up the share price, about $1,100 and multiply it by the number of shares to find what the company is currently “valued” at – about $790 billion. But does value always equal precisely what a company is worth?

If Google were to go out of business tomorrow and have a fire sale, offering up everything they have from patents to buildings, desk chairs to web servers, the total output would be significantly less than $790 billion. Likewise, if they were to announce a fully autonomous car, the value of the company could go up, likely by a significant amount.

The “worth” of a company goes beyond what it is presently priced at, to what the price could be in the future. Investors look at a company, say to themselves, “I like what they’re doing, and I expect them to grow in the future,” so they invest. They factor in a mix of intangibles: prospects for growth, risks, market conditions, and even a dash of hope, then decide to purchase a piece of that company. Collectively these purchases form the current share price.

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Steve Booren

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Forbes Top Wealth Advisor in Colorado.

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Improving Investor Behavior: Strengthen Your Financial Superpowers

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This article originally appeared in the Denver Post, July 21, 2019.

My son and I were in the car driving to the store as he struggled to plug in his phone with a USB cable. He flipped the cable back and forth a few times before it finally slipped in. “If I had a superpower, I hope it would be to knowing which direction I should use when plugging in a USB cable.”

Over decades of advising families, I’ve studied their investment behavior. From those who made mistakes to those who succeeded, a list of significant practices naturally came to mind. These “superpowers” help make investors successful. They can’t leap over buildings with a single bounce or see into the future (though this could be a pretty good investment superpower), but they do manage to achieve better than average results, almost as if by magic. What are these superpowers?

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Steve Booren

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Forbes Top Wealth Advisor in Colorado.

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Improving Investor Behavior: Retire to What?

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This article originally appeared in the Denver Post, June 16, 2019.

If I asked you to define retirement, how would you describe it? Take some time and think about it. You’re probably envisioning white sandy beaches, trips to the golf course, and visits with family, free from the constraints of work and email. Sounds nice, right?

That’s how a lot of people see retirement. The belief is that upon reaching a certain age (usually around 65), retirement should be an expectation – a foregone conclusion. And once retired, people will get to enjoy “the good life” of unlimited freedom, time, and fun.

But when I’m asked to define retirement, I do it a little differently. I think back to 1996.  Read more

Steve Booren

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Forbes Top Wealth Advisor in Colorado.

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Improving Investor Behavior: The Positive Mindset of Investors

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This article originally appeared in the Denver Post, May 19, 2019.

Pessimism is poison for investors. Following national headlines would have you

believe we are moments away from catastrophe, teetering on the edge of sheer doom. It’s an easy narrative in which to engage, especially when we hear it every minute of every day. The problem is that repetition often convinces people, and once convinced, people tend to ignore logic. That is poisonous for investors.

If you’ve been following this column, you understand just how damaging emotions can be when it comes to investing. Emotions cloud judgment, muddy decision making, and create stressful situations. Now I’m not going to tell you everything in our world is great, but the reality is things are pretty good. Our world is arguably better than it has ever been.    Read more

Steve Booren

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Forbes Top Wealth Advisor in Colorado.

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