2012Aug20 Cliff Hanger
When you stand at the edge of the cliff, jump to fly, not to fall...and pray Superman is around. ~ Anonymous
Politics and business:
Company executives are postponing decisions such as hiring and plant-building until they can get some clarity from Washington on the looming "fiscal cliff" and possible higher taxes, according to an analysis of earnings conference calls by Goldman Sachs.
"Regulatory direction and political uncertainty remain key concerns to corporate leaders," wrote David Kostin, a Goldman strategist, in the note. "Firms expressed a uniform desire for regulatory clarity."
"In the US, uncertainty stemming from this year's elections and the looming fiscal cliff constrains the ability of businesses to make important decisions, such as: hiring new employees, making capital investments, and restocking inventories. This will further restrict economic growth."
The so-called fiscal cliff refers to the expiration at the end of 2012 of several tax cuts enacted under President Bush and mandatory spending cuts resulting from the debt ceiling fight last summer.
The increase in partisan rhetoric surrounding the presidential race is putting the fiscal cliff worry at the forefront of executive's minds as they believe it raises the chances that a bitter Congress does nothing before the end of the year, no matter who wins.
"So for the remainder of 2012, unfortunately all eyes are still going to be on politics and the economy," said Larry Fink, CEO of Blackrock, on the earnings call for the largest U.S. asset manager. "We have elections in November followed by the impending fiscal cliff and the sequester. This will likely create additional uncertainty and lead to more soft business sentiment and probably a reduction in consumer spending."
Let's face it; investors often make bad investment decisions. Commonly, this is due to our emotions getting in the way. BlackRock lists some of the emotional investment tendencies that often cloud our judgment and steer us toward poor decisions:
Anchoring: Holding onto a reference point, even if it's irrelevant. For example, a $1.5 million house, being presented on its own, might sound expensive. But if you were first shown a $2 million house, and afterwards shown the $1.5 million house, it might then sound like a good deal.
Herding: Following the crowd. People often pile into the markets when they are doing well and they see "everyone else" doing it.
Mental Accounting: Separating money into buckets that are treated differently. Earmarking funds for college savings or a vacation home allows you to save for specific goals. But treating those dollars differently may not make sense when they all have the same buying power.
Framing: Making a different decision based on context. In a research study, when a four-ounce glass had 2 ounces of water poured out of it, 69% of people said it was now "half empty." If the same glass starts out empty and has 2 ounces of water poured into it, 88% of people say it is "half full."
One way to combat our emotions is to hire a good advisor. As explained in this previous blog post, one important benefit-maybe even the primary benefit-of having a good advisor is behavior modification. An advisor persuading a client to invest more when the market is doing poorly, instead taking money out, is extremely valuable.
In short, understanding your emotional tendencies may help keep them from interfering in investment decisions. If that isn't enough, try enlisting the help of an outside source. With the steady hand of a good advisor, it may be possible to mitigate emotional investment tendencies.