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Eye on goal
1. Keep Your Eye
on Your Goals
Many investors believe that high returns come with low risk and
by Meir Statman
low returns come with high risk, when in reality the opposite is
Glenn Klimek Professor of Finance true. Back in January 2000, at the height of the internet bubble,
Santa Clara University expectations of risk were very low and expectations of returns
were very high. This was due to our tendency to extrapolate into
the future the very high returns of 1999 and the exaggerated
If someone asked you, “Why is wealth important to you?” what exuberance accompanying the internet bubble.
would be your answer? In a recent survey of high-net-worth In contrast, expectations of returns were very low in Febru-
families, financial security was the most popular answer, followed ary 2009, the darkest time of the financial crisis, and expecta-
by help children become successful, educate children and help the tions of risk were very high. This combination was due to our
less fortunate.1 tendency to extrapolate into the future the very low returns of
Financial security is more than money in our portfolios; it is the 2008 and early 2009 and the exaggerated fear accompanying
confidence that we can continue to live in dignity and support the financial crisis.
ourselves financially rather than rely on our children. Investors who acted on their exuberance and piled into stocks
A diversified portfolio that follows a prudent investment plan in January 2000, ended up as losers. So did investors who acted
can help get us to our long-term goals — like financial security on their fear in February 2009, abandoning stocks and missing
and helping our children — yet we worry daily as we watch out on large gains.
markets go up and down. We are wise to remember that we are not immune to misleading
The booms and busts of markets unnerve all of us, even those emotions, but we can be smart enough to resist them. Once we
not investing in the markets. Anita Radcliff and Karl Taylor of recognize these emotions, we should pause, take a deep breath
the University of Sheffield in Britain found in a recent study and consult with our advisors, making sure to include a review
that higher stock prices are associated with better mental health, of our Investment Policy Statement.
whereas greater volatility of stock prices is associated with worse We can’t control the markets, but we can control our emotional
mental health. This was true even for people holding no stocks.
reactions to them.
Their research found that stock prices “matter to mental health ________________________________________________
because they perform the role of economic barometer.”2
(MZIVWM½GEXMSR RIMXLIV EWWYVIW E TVS½X RSV KYEVERXIIW EKEMRWX PSWW MR E
Yet we must be resilient in the face of daily stock market volatility, HIGPMRMRK QEVOIX
even decades-long volatility, because our emotions can make us 1
The SEI Family Wealth and Succession Survey, “The Generation Gap,” .YRI
do things that lead us away from our financial goals rather than
closer to them. Here is an example of how our emotions can get 6EXGPMJJI %RMXE ERH8E]PSV /EVP
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![Keep Your Eye
on Your Goals
Many investors believe that high returns come with low risk and
by Meir Statman
low returns come with high risk, when in reality the opposite is
Glenn Klimek Professor of Finance true. Back in January 2000, at the height of the internet bubble,
Santa Clara University expectations of risk were very low and expectations of returns
were very high. This was due to our tendency to extrapolate into
the future the very high returns of 1999 and the exaggerated
If someone asked you, “Why is wealth important to you?” what exuberance accompanying the internet bubble.
would be your answer? In a recent survey of high-net-worth In contrast, expectations of returns were very low in Febru-
families, financial security was the most popular answer, followed ary 2009, the darkest time of the financial crisis, and expecta-
by help children become successful, educate children and help the tions of risk were very high. This combination was due to our
less fortunate.1 tendency to extrapolate into the future the very low returns of
Financial security is more than money in our portfolios; it is the 2008 and early 2009 and the exaggerated fear accompanying
confidence that we can continue to live in dignity and support the financial crisis.
ourselves financially rather than rely on our children. Investors who acted on their exuberance and piled into stocks
A diversified portfolio that follows a prudent investment plan in January 2000, ended up as losers. So did investors who acted
can help get us to our long-term goals — like financial security on their fear in February 2009, abandoning stocks and missing
and helping our children — yet we worry daily as we watch out on large gains.
markets go up and down. We are wise to remember that we are not immune to misleading
The booms and busts of markets unnerve all of us, even those emotions, but we can be smart enough to resist them. Once we
not investing in the markets. Anita Radcliff and Karl Taylor of recognize these emotions, we should pause, take a deep breath
the University of Sheffield in Britain found in a recent study and consult with our advisors, making sure to include a review
that higher stock prices are associated with better mental health, of our Investment Policy Statement.
whereas greater volatility of stock prices is associated with worse We can’t control the markets, but we can control our emotional
mental health. This was true even for people holding no stocks.
reactions to them.
Their research found that stock prices “matter to mental health ________________________________________________
because they perform the role of economic barometer.”2
(MZIVWM½GEXMSR RIMXLIV EWWYVIW E TVS½X RSV KYEVERXIIW EKEMRWX PSWW MR E
Yet we must be resilient in the face of daily stock market volatility, HIGPMRMRK QEVOIX
even decades-long volatility, because our emotions can make us 1
The SEI Family Wealth and Succession Survey, “The Generation Gap,” .YRI
do things that lead us away from our financial goals rather than
closer to them. Here is an example of how our emotions can get 6EXGPMJJI %RMXE ERH8E]PSV /EVP](https://image.slidesharecdn.com/eyeongoal-130104103543-phpapp02/85/Eye-on-goal-1-320.jpg)
