In five weeks at Joule Financial, one major theme has developed: psychology dominates this industry. Here are a few things I have learned about this so far:
-In one of my upper level finance classes at the University of Kentucky, my professor started our grades at 100% on day one of the year. Rather than starting from 0%, we started at 100% and every point we lost throughout the semester would reduce our grade. It was an interesting concept, but all other things being equal, my grade at the end of the semester should be the same as if I had started at 0%, right? Not so much, this class performed, on average, 12% higher in final grades than the other classes learning the same material but using the standard grading. The culprit: loss aversion, which is the concept that we are hardwired to be more sensitive to potential losses than potential gains. At Joule, we realize the importance of loss aversion, so we walk our clients through potential worst case scenarios and focus on the cost of potential losses rather than the excitement of potential gains.
-We have been utilizing a new planning program at Joule that helps us dynamically create plans and scenarios for our clients. The program spits out the best possible mathematical strategy based on assumptions and our client’s information. It would be easy for us to just look at numbers and say,“Here you go, this is what you should do.” The hard part is to understand the psychology that can impact the numbers. The numbers say that you should invest that $200,000 you got from selling your house, but in practice, you would probably sleep better at night if you paid off part of your new mortgage instead. The math may say that it is better for you to not move from Wisconsin to Florida, but you may not care when you are scraping a foot of snow off your windshield to go to the grocery store. The numbers say that you should stay at your high paying job, but if you are miserable going to work every day, who cares about the numbers? The point is that the numbers are extremely valuable, and we must consider them, but it is just as important to consider the psychology and make decisions that incorporate both.
-In several meetings, I have heard Quint mention that during the Covid-related market decline earlier this year, there were only four clients that put money into the market. Two of those people work on our team. This all comes back to the most important factor in the finance world, “What is the goal?”. Our brain may tell us that in a decline we must get out before we lose more, but if we focus on the goal, we may realize the exact opposite. If my goal is to retire in 40 years, there is no better time to “buy cheap” than amid a decline. We must push ourselves not to have that knee jerk response of “get me out” but to focus on our goal and consider investing opportunities in those situations.
-The stock market has some amazing qualities but perhaps one of the worst is that we can see what it is doing every day. A common phrase in our office is, “It is not timing the market but time in the market”. Throughout the history of the stock market, for every decline there has been a greater incline. It takes time, let compound interest do its job, and be patient. Covid will not have a massive impact forever, someday soon we will be able to go to a country music concert (Eric Church is my favorite), and we’ll continue to expect that the stock market will rise. From what I’m learning, psychology is massive in this business – the more we can understand how it influences our decisions, the better decisions we can make as advisors and the better decisions you can make as household financial leaders.