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Head Games

Written By: Scott Inman

Financial Advisor

March Madness is one of my favorite times of the year. Anything can happen on the basketball court during the NCAA tournament, and it’s the unpredictability that makes it the best drama on television. There will always be a buzzer beater shot that decides the big game.  I find myself on the edge of my seat, my heart beating a little faster, as I watch it all play out between two teams I normally would have no interest in. I can’t imagine how intense the moment is for the player taking the shot.

USA Basketball says the physics of making shots is the same for everyone. But, the mental aspects of it can make the difference in whether or not those big shots go in. In an article titled, “10 Tips to Improve the Mental Side of Shooting,” author Tony Fryer lists as one of his tips, “Improve Your Shooters EQ.” Maybe you’ve heard of Basketball IQ, the instinctive ability of basketball players that enable them to make the right decisions at the right time. But, Shooters EQ stands for Emotional Quotient. Fryer writes it is, “a player’s ability to control emotions regardless of the changing circumstances of a basketball game.”

This is an important tip for investors too. An investor’s EQ is the investor’s ability to control emotions in the face of changing circumstances in the market and in varying economic conditions. Volatility has returned in a big way to the market in 2018, and emotional reactions to that can cause investors to make the wrong decisions at the wrong time, affecting their overall returns, and negatively impacting their retirement goals.

According to a study from BlackRock, Bloomberg, and Informa Investment Solutions, the S&P 500 Index averaged 8.19% annually over a 20 year period from 1996-2015. Bonds, as measured by the U.S. Aggregate Bond Index grew by 5.34% annually over that same time period. But, the average investor, got a return of 2.11% annually. That’s less than inflation, which grew by 2.18%.

There could be many reasons this occurred. But, one of the big ones is, the market rollercoaster causes the average investor to jump off when the coaster is on the way down, and miss the ride when it’s on the way up. Then, they get back on when the ride is about to reach the top. In other words, they sell low and buy high.

Researchers from J.P. Morgan conclude that missing just the 10 best days of the market in any given year can cut your annual returns in half. Missing the 20 best days could result in even bigger missed opportunity. That’s because often times the best days occur within days or weeks of the worst days. If your investor EQ causes you to sell after the worst days, you may not be invested during the best days.

So, how do you improve your investor EQ? Hire a coach. The players who hit those shots to beat the buzzer in the NCAA tournament all have a coach who worked on their physical game but also helped them with their mental game. A financial advisor should look at themselves as an investor’s coach. There is the physical help of building a diversified portfolio with an objective of meeting long-term financial goals like retirement, which will be suited to weather some of the storms of the market. But there’s also the mental help of being the calming voice in the middle of that storm. An advisor can look at your portfolio, and market conditions objectively, and through research and experience point the way where we want the shots to be ultimately headed; the bottom of the net.