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ATAC Week in Review: The Age of Anxiety

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Your ability to stick to a strategy matters more than the strategy itself.

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The problem is we have to deal with people.
-Don Hogan

If one were to look at the behavior of stocks last week, ignoring the noise of day-to-day movement, it would have seemed like a no-brainer to be exposed to beta.

Sentiment got extraordinarily bearish and gloom dominated the airwaves, particularly following Monday's big drop, which was reversed in but a couple of days.

With hindsight, it looked obvious that a move higher was coming.

Of course, hindsight is formed on unemotional facts regarding the behavior of stocks over several days.

Living in those days and dealing with the action as it is happening is a completely different animal. That daily volatility and noise can create tremendous anxiety, often resulting in investors and traders selling out of their investments at the worst possible time.

Studies overwhelmingly show that the vast majority of investors do not achieve anywhere near the return of the actual investments they own precisely because the anxiety that daily volatility creates results in overtrading based not on quantitative unemotional metrics, but pure emotion.

That anxiety ends up being more costly to longer-term returns than taxes, commissions, slippage, etc.

The world that we live in, unfortunately, makes anxiety on average more elevated than ever before as we get inundated by information.

It makes us feel like we have more control over the world around us, when in reality, that information drives sub-optimal decision making.

The Age of Anxiety in financial markets is being driven by the Age of Information in more traditional ones. That is not to say that information is bad to have and that we shouldn't always strive to find out what is happening in the world around us.

Rather, it simply means we need better filters to only focus on things that matter, and to not let short-term market gyrations, which may be entirely random, impact our long-term goals for wealth generation.

I've met with thousands of financial advisors over the past year and a half, and it is clear to me that anxiety is pervasive among investment professionals.

Why?

Because their clients whose money they are managing keep hearing day to day about how the Dow or S&P 500 did. The emotional response created from these clients creates anxiety for the financial advisor.

Even if the advisor knows better, that emotional pressure coming from clients makes it hard for them to stick to their own asset allocation strategies. It is for this reason that it is largely unimportant to ask how some investment performed. Even if you had perfect foresight, that actual investment's return would likely never have been achieved.

Too much information is a bad thing because factually, very little information has predictive power (for an example of something that does, click here to download our award-winning papers).

Focus on longer-term cycles and strategies designed to take advantage of those periods, rather than the day to day noise of market movement.

Your ability to stick to a strategy matters more than the strategy itself. What prevents people from sticking to an investment strategy is emotion and anxiety.

The Age of Anxiety isn't going away - recognize it, and shield yourself from it.

Oh and about that big news coming from us this week...

Getting Ear Plugs,

Michael A. Gayed, CFA
www.pensionpartners.com

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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