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Investing in Volatile Markets With Rachel McDonough

MoneyWise | Sep 16, 2022

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Show Notes

The market’s always headed up or down. Which way, no one knows, but you have to plan for either. We’ll talk about that today with Rachel McDonough.

  • Rachel McDonough is a Certified Financial Planner and a Certified Kingdom Advisor … and she’s passionate about helping investors integrate their Christian values with their financial decisions.
  • McDonough says if you’ve felt a strong, emotional impulse to sell your investments, you’re not alone! Volatile markets test our resolve and conviction in our strategy. Wealth that took you years to accumulate may appear to be evaporating every day as account balances dwindle under the pressure of falling markets.
  • Researchers in behavioral finance have studied how an investor’s emotions, biases, and irrational decision-making, especially relevant during times like these, can lead to bad investing results, and that following your instincts can (and typically does) lead to financial self-sabotage.
  • J.P. Morgan looked at this and found that the average investor experienced only a 2.9% annualized return over the past 20 years, but the S&P 500 had a 7.5% return for that period. While multiple factors impact performance, the biggest factor hurting performance is poor timing when the average investor decides to buy, sell, and switch investments. Irrational emotions are thought to be the culprit, triggering investors to sell low and buy back in higher, when markets have recovered and feel safer.
  • EMOTION IN INVESTING
  • Financial advisors are trained to take a more rational approach and encourage clients to do the same, generally ignoring emotion, instinct, or intuition.
  • Instead, they take their cues from software, graphs, and historical data, idealizing a purely academic approach to investing. In fact, inside the financial services industry, anytime someone uses the term “emotion” in the context of investing, it’s largely assumed that a poor decision was made.
  • But “emotion” became an undesirable term because it was narrowly referring to a couple of negative emotions, specifically: fear and greed. We all experience these to varying degrees, and if left unchecked, they most certainly can sabotage one’s financial future.
  • But are emotions always a bad thing when it comes to investing? And is it possible or wise to turn them “off” when it comes to something as emotionally charged as investing our life’s savings?
  • Let’s look at the biblical narrative regarding our design and nature. That’s where we can find some guidance on how to get our emotions working for us, rather than against us, in a way that could lead to more meaningful investment outcomes.
  • The Bible teaches, in Genesis 1:26-27, that all people (regardless of their faith) are made in the image of God. Part of God’s nature is logical and orderly, and part of his nature is emotional and passionate.
  • In the Garden of Eden, God pronounced his design of human beings as “very good.” So as a starting point, let’s acknowledge that the complex and intricate design of our human soul is good, even the sometimes messier, emotional part.
  • We can also glean from the Scriptures that our emotions should be governed by self-control (one of the fruits of the Spirit listed in Galatians 5:22-23). But rather than forcing a good part of our nature to be silent so we can presumably make savvier decisions, let’s explore positive and productive ways to include our emotional selves in our investing.
  • Very little research, if any, has been done on the effect of virtuous emotions like compassion, joy, humility, contentment, or patience, on investor behavior and outcomes. While unproven, McDonough believes this concept is worth exploring.
  • Emotional engagement and buy-in can be incredibly helpful to investors, especially those motivated by their faith, allowing them to develop a strategy to which they have a higher degree of conviction, allowing them to stay the course more easily in moments of stress.
  • This in turn can mitigate the risk of selling during market downturns, locking in losses, and missing out on the recovery.
  • So how can using our emotional intelligence lead us to better decision-making?
  • By tapping into your heart for values-based investing in a volatile market. It helps you consider factors that a merely rational (numbers only) approach might overlook. Investing has many outcomes in the world other than the numbers on your financial statement.
  • Investing choices lead to many different real-world impacts, such as enabling businesses to innovate, care for their customers, meet basic human needs, address slave labor from their supply chains, and provide equitable benefits for their employees.
  • When we apply compassion in our investing, we can avoid partnering with companies whose products and services harm people (such as tobacco companies) and intentionally choose to channel our capital into positive companies that are serving humanity well.
  • These are valuable outcomes that resonate deeply within our soul and can lead to a sense of emotional satisfaction and contentment when we see them connected with our investment choices.
  • We don’t often think of Jesus’ 2nd Commandment in terms of investing, but it seems we should.
  • This approach to investing applies the principle of loving our neighbor in a practical and specific way. Knowing that we’re investing in alignment with Jesus’ teachings can give us a feeling of confidence as we are proactive with the decisions we can control and trusting Him with the outcomes.
  • It helps us avoid second-guessing our strategy because we know it’s in alignment with his Word. There’s nothing like a clean conscience to help us sleep well at night, no matter what happens in the market.
  • The bottom line is that emotions aren’t necessarily bad for investing.
  • Investors aren’t well served by timing their trading around their emotions, but they can certainly benefit from emotional engagement when developing their investment strategy.
  • Doing so can help ensure a good fit with both the logical mind and the emotional mind.
  • The heart of Christian investing is to invest in such a way that it is aligned with our hearts and our heads, and, most importantly, is pleasing to the Lord.
  • (RW) Rachel McDonough is a Certified Kingdom Advisor, a Certified Financial Planner and the founder of Wealthfluence.com.

On this program, Rob also answers listener questions:

  • Is it a good idea to keep a home equity line of credit open?
  • Does it make sense to take money out of retirement accounts to pay off credit card debt?
  • RESOURCES MENTIONED:
  • Christian Credit Counselors

Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to Questions@MoneyWise.org. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app.

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