Analysts say emotions can hurt investors

BANGOR – If you’ve lost money in the stock markets, it’s your own fault. According to analysts, you’ve listened to – and acted on – the wrong advice. You were emotional when you were investing, and not thinking clearly or intellectually.

Now, after two years of stock market declines, you don’t know what to do. Or who, among all the people dispensing investment advice, to trust.

And Wednesday’s almost 488-point gain, the first positive market response in more than nine weeks, is adding to your confusion. You may be asking, “Did I miss out on the recovery by not contacting my stockbroker and buying?” Or you may be questioning why you sold your stocks last week.

Believe it or not, there’s a psychology to how you invest, according to a behavioral expert who’s watching what you and others like you are doing with your money.

John Nofsinger, an assistant professor of finance at Washington State University, feels your pain.

He knows you’ve listened to money managers hype up a fund or stock and subsequently lost your money. Then you found out the money managers were promoting funds they had a financial interest in. You held on, stayed the course and invested for the long term, as you were told to do by analysts, only to watch the money you planned to have on hand for your retirement slip through your fingers.

You sat in horror as companies such as Enron and WorldCom filed for bankruptcy because of exaggerated earnings and corporate irresponsibility.

“A lot of investors are feeling, ‘Hey, this isn’t my fault,” said Nofsinger, author of a new book titled, “Investment Blunders (Of the Rich and Famous) … And What You Can Learn From Them.” “Now they don’t know what to do.”

According to Nofsinger, you’ve relied too much on your emotions when you’ve invested your money. You’ve seen patterns in random events, such as major price stock movements like those experienced recently, and made incorrect investment decisions based on them, such as selling low. You’re supposed to be buying low, he said, and selling high.

“Intellectually, we understand that, but emotionally, we can’t do that,” he said.

Even a good mood such as the one you were feeling when the markets closed Wednesday can be detrimental to your finances because optimism tends to make investors like yourself less analytical and more likely to take bigger risks, he said.

“Of course, nobody likes to admit they’ve made a mistake,” said Nofsinger, in a telephone interview Wednesday.

Now you and other investors need help, and you don’t know whom to turn to, he said.

“There’s been so much conflicting advice for so long, [investors] don’t know what’s good advice and what’s bad advice,” Nofsinger said.

These days, there’s plenty of blame to go around for the recent declines in the stock market. Investors are pointing their fingers at financial analysts and money managers for giving the wrong advice, and in converse, the analysts are telling investors it’s their own fault for not educating themselves before putting money into the market.

According to a survey by InsightExpress, conducted earlier this month, almost three-fourths of the 300 investors contacted blame chief financial officers, accountants and auditors, and boards of directors for the current financial crisis. More than 70 percent believe companies purposely are withholding information from the public.

In Maine, investment firms are receiving thousands of calls from clients asking for advice on what to do now. Judy Groth, a certified financial planner with Groth and Associates-American Express Financial Services in Bangor, said investors for too long have been watching the financial television programs and doing what the analysts say, whether it’s sell, hold or buy.

“That’s part of the confusion,” Groth said. “There’s general advice out there. My feeling has been that everyone’s willingness to give advice in the media has been part of the problem. And individuals don’t know what it means to them.”

Groth said she wonders why individual investors heed the nationally televised financial advice as being in their best interest. Would they do the same if it were medical advice?

“Of course not,” she said. “Everyone is so different.”

Those investors who sold their stocks in recent weeks may be upset that they did that, questioning whether they now will miss out on the market’s recovery. Yet others may wake up today and want to spend money, causing a “bottom feeding” of investments in stocks that may not be worth it regardless of whether the market is up or down, he said.

At Fidelity Investments in Boston, spokeswoman Jenny Engle said individual investors charged with the responsibility of managing their own money in 401(k) accounts need to understand that the rules of investing have not changed. She said investors need to educate themselves, take advantage of all the tools that are available, whether on a Web site or through a financial planner, and diversify their holdings.

“Taking a long-term view is more effective than trying to time the market,” Engle said.

Nelson agreed with the long-term approach, stressing the need to diversify and to not be too aggressive with high risk stocks.

“You’re going to get these occasional periods,” said Nelson, referring to the nine weeks of market declines and trying to put it into a historical perspective of the stock markets. “When you get these kinds of big blow-offs, that’s kind of the exclamation point. You’ve got to wait it out. Be patient, and you’ll be rewarded in the long run.”