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 Meet
today’s money manager: one part financial wiz, one part psychologist.
And the second part may be at least as important as the first.
“My job is probably 25 percent financial expert and 75 percent psychologist,”
says Don Kukla, a principal at Moneta Group, a financial planning
and services firm.
Don Streett, chairman of the investment advisory firm of Duncker,
Streett & Co., actually majored in psychology while he was in college
and wrote his thesis on faith and religion. “Those are two very
good disciplines to have in this business,” he says matter-of-factly.
John Prosperi, managing director of Argent Capital Management, a
stock and bond portfolio management company, says that anticipating
and responding to the psychological needs of investors is a big
part of the job of the portfolio managers at Argent. “We try to
take the emotion out of the investment process, and we’re trained
to do that.”
It’s probably a good thing that someone is looking out for the mental
health of investors. After all, U.S. stocks between January and
June suffered their steepest first-half decline in 32 years. No
doubt, some fortunes that were made during the salad days of the
1980s and ’90s wilted on the vine. And the small investor, with
401(k) contributions invested in stocks, saw retirement funds shrink.
It’s all enough to drive one to the shrink, who these days might
be your money manager. He may not put you on the couch exactly,
but he does want to know what’s inside your head.
“Understanding your client’s investment behavior is paramount,”
says Kukla, a Moneta manager since 1988. “But you can’t just hook
them up to an EKG machine to learn what makes them tick. You have
to listen to people and to what they are trying to tell you—their
hopes, their dreams and their fears. And then you have to create
a financial plan that meets their needs from a psychological perspective
as much as a financial perspective.”
“We have to be constantly aware of the individual predispositions
of the clients, their ideas and theories,” says Prosperi, a former
money manager with Fidelity Investments and American Funds Group.
“We have to try to understand where the client is coming from and
present information that takes all of that into consideration.”
Streett, an investment advisor for more than 30 years, adds, “Investor
emotions swing from greed to fear. A few years ago, greed had the
upper hand, and now fear is as present as greed. And moods influence
the direction and the magnitude of the market.”
Don
Kukla, principal, Moneta Group |
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Those mood swings,
experts agree, are reflected in the area of study known as behavioral
economics. The discipline is part psychology, part economics and
is used to try to explain why and how people make seemingly irrational
or illogical decisions when they spend, invest, save, and borrow
money. Some of the discipline’s terms are, in fact, grounded in
psychology and sound like it: loss aversion, sunk cost fallacy,
status quo bias, decision paralysis, confirmation bias, overconfidence,
and others.
Those terms may not be enough to give you an Oedipus Complex, but
they may explain, for instance, why some investors refuse to sell
their down and out securities. (Two possibilities: “sunk cost fallacy,”
whereby people can’t forget money that’s already spent; or the so-called
“endowment effect,” under which people tend to fall in love with
whatever they own). Or why some people stash their money in passbook
savings accounts or bank CDs when they’re actually losing money
by doing so. (One behavioral candidate: “the money illusion,” under
which people tend to ignore the impact of inflation). Or even why
some people don’t invest at all (behavioral explanation #1: “decision
paralysis”).
Behavioral economic theories deal with the negative impact of flawed
thinking and emotion. They focus on the bad decisions we make, not
the good ones. That makes sense to Kukla.
“The fact is that negative emotions are much stronger than positive
emotions,” he says. “People see the losses they’re seeing now and
feel that the losses will continue unabated forever. They think
they will run out of money.”
Prosperi says “Chicken Little” theorists who think that “the market
is going to hell and you better convert to cash” always rise as
markets fall.
| John
Prosperi, managing director, Argent Capital Management |
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So, what do
money managers have to say, not only to the doomsayer, but also
to the skittish investor?
Kukla says that he points out that the last really unsettling market
decline was in 1973-74 and that “now we’ve hit the first major bump
in the road in 28 or 29 years. People need to know that we’ve lived
through this before and will probably live through it again.”
Streett has in his office a Wall Street Journal cartoon that
opines, “There’s been nothing but bad news for the past 50 years,
but we’re all still here.”
| Don
Streett, chairman, Duncker, Streett & Co. |
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He advises clients
to “have faith in the system. Over the long term, investing in U.S.
equities, and to a lesser degree global equities, is the best way
to put your money to work. That’s not to say that there isn't a
time to sow and a time to reap. Right now, the ground is being turned
over in the investment world, and seeds that can be planted in legitimate
enterprises will bear fruit in a few years.”
Kukla advises clients to be goal-driven, not number-driven. “The
goal should be to maintain a comfortable lifestyle in retirement,
not to make some arbitrary amount, whether it’s 8 percent or 20
percent, each year. People have to realize that these things go
in cycles. The only really big losers are the ones who thought things
had really changed and bought all those tech stocks. They bet the
ranch that it was really a whole new world. Well, it wasn’t then,
and it isn’t now.”
He adds: “The question for the investor is, ‘Do I believe that companies
around the world will continue to produce products; that people
will continue to buy those products, and that those companies will
continue to grow?’ If so, the answer is still to be found in the
stock market.”
Streett, the former psychology major, says his best advice is rather
homespun. “Know thyself in terms of what risk you are willing to
take and select stocks that reflect your degree of comfort. After
that, be true to yourself; don’t be greedy when times are good,
and don’t get carried away when times aren’t so good.”
William V. Poe is principal of Poe Communications, a St. Louis
advertising and marketing communications firm.
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