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Advisors Must Address Psychology of Markets

SuperUser Account posted on November 11, 2011

Rick Rummage

is CEO of The Rummage Group, a recruiting firm.

Macroeconomic factors are top of mind among advisors these days. Advisors hear a lot of discussion and debate about what causes an economy to grow or fall into a recession; what causes a boom or bust? We are all busy discussing financial events in Europe or political changes in the Middle East, but I don’t hear enough advisors talk about the psychology behind the market’s ups and downs. It’s unfortunate because many investors could significantly benefit from a discussion on the emotional nature of the markets.

Ultimately, everything in the economy is a function of Mother Nature or caused by human beings, who are controlled by their feelings. With the economy, what we need the most is for people to feel good once again. We need a sense of optimism. This can go a long way in encouraging businesses and individuals to start spending and investing money.

Deeper discussion on market psychology can help investors understand why the economy, like human emotional cycles, goes through bullish and bearish periods. Most investors will have experiences where they can’t get enough of a good thing, and then go into a state of excitement and a mindset of invincibility. This was the same case when the great bubble of the stock market reached a peak in early 2000, and a crash followed. We created the great real estate boom of the early 2000s, which reached a peak in 2006, and a bust followed. Proactive discussions about the market’s emotional and cyclical elements can help get investors off the couch and get them spending and investing again.

Further, the financial services community needs to better explain to the average American that it is entrepreneurs who provide them with jobs and can give the economy more momentum. Therefore, the private and public sectors – and consumers to a degree, too – must create an environment in which entrepreneurs want to hire and make capital expenditures. Dangling a carrot will always help a horse trainer get the results she wants faster than beating the animal with a stick. From a psychological standpoint, I know that the business owners who drive the economy feel like they have recently been beaten with a stick. How is this supposed to make us feel good – and want to hire and assume additional risk?

I have confidence that investors and advisors can play a leading role in bringing positive momentum back to the U.S. market. Our country is still relatively young, yet we have achieved a lot in a very short historical period of time. All the immigrants that have arrived in our country, and are still coming, have done so while taking on plenty of risk and hardship. In many cases, people risked their lives to be in a country where anything is possible with hard work and dedication. This, I believe, is in contrast to many critics of our government and financial system today.

In our early days, just about everyone who immigrated to the New World was an entrepreneur – either a farmer or hunter. They got up early and worked hard and late. If they did not produce, they did not eat. The psychology of the average citizen was that they can make a big difference in the world on their own.

We are never going to stop the boom-and-bust cycle, just like we will never stop individuals’ moods from changing between happy and sad. But investors and advisors need to know that by sheer force of will and optimism, they can help steer our country’s economy out of its current depressed state. We need to acknowledge, too, that all the regulations in the world will not stop economic cycles; rather, they will kill that which made our country great. We need to stop saving people from themselves. We need to let people fail, just like we did in the first 100 years of our union. We need to understand who flies the plane and do what we can to help them so that all passengers land safely.