Charlie Brown Got It Wrong
By Ric Edelman
Grief is never good
Is losing money the same as dying?
Apparently so, according to Massachusetts Institute of Technology professor Andrew Lo. His new study found that investors who experience substantial market losses experience anger, denial, bargaining, depression and, ultimately, acceptance — the same five stages of emotion that one experiences when facing death.
As a result, he says, people who suffered major losses in 2008 are having difficulty making financial decisions today because they are still grieving.
Lo’s research helps explain the results of a survey by Franklin Templeton Investments (an investment company not associated with us) which shows that 66% of Americans wrongly believe that the stock market was either down or flat in 2009. In fact, the Dow Jones Industrial Average* rose 22.9%.
Persistent feelings of grief, caused by 2008’s substantial losses, are preventing millions of investors from acknowledging that economic recovery is well under way. The sharp losses of 2008 have seared painful memories into many people, causing them to draw wrong conclusions about investments. In the Franklin Templeton survey, nearly 60% said they believe gold had a better total return than stocks over the past 30 years; in reality, gold returned 2.3% annually while the S&P 500 Stock Index grew 11.2% per year, according to Franklin Templeton. Indeed, $10,000 invested in gold 30 years ago would have grown to $19,979 by December 31, 2009, while the same amount invested in an index mimicking the S&P 500 would have grown to $244,018.
Clearly, investors in pain do not think rationally. How else to explain why 57% believe stocks are too risky right now? Even worse, 34% are not saving at all, for fear of losing the money they’d invest. Amazingly, many people would rather save nothing — and thus end up with nothing — to avoid the pain should they lose some of what they’ve saved!
If the market turmoil of 2008 scarred you as much as it did your investments, talk with a financial advisor — and perhaps a psychologist, too. If you don’t find a way to move past your grief, unpleasant memories and emotions will prevent you from making the financial decisions that are in your best interests. And if that happens, you’ll later experience yet another emotion, one that you surely want to avoid.
What is that emotion?
* An Index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.