Inside ETFs: Our audience is made up more of financial advisors, who build long-term asset allocations for clients. Would the same principles you described still be relevant?
Shull: Yes; 100%. In fact, maybe more, as your decisions will play out over the longer term, which means they actually matter more. First—and the key for advisors here—is understanding that both their emotions and their clients’ emotions matter.
Instead of setting emotions aside, they can use emotions to gather information leading to the best possible decision. Trying to understand the client’s emotions and helping the client understand their emotions can help remove fear, stop impulsive decisions and stay focused on the long-term plan.
Inside ETFs: You’ve mentioned a few times now that we shouldn’t avoid emotions, but are all emotions equal in the decision-making process?
Shull: To some extent, all emotions play a role in the process. What advisors or investors have to develop is emotional knowledge. This is learned over time, the ability to recognize what the emotions are, learning how to label them and apply them properly.
That’s the hard part for people: It isn’t easy to identify, label, separate, organize and categorize their feelings. From there, you can pick and choose the bits of information you need from each emotion.
Inside ETFs: Fear is often associated with leading to bad decisions or preventing investors from making a change. Can positive feelings have a negative effect on the decisions we make?
Shull: Overconfidence is just as problematic as fear. Overconfidence tends to show up in other ways. Perhaps an investor might rely too much on their gut feeling, since in the past, that’s had positive results. This is where we need to learn to step back and look at each decision we make as a new decision. Since we feel confident, we’re more likely to rush into a bad decision.
In reality, negative emotions in their pure form—fear, anger, etc.—are meant to help us. Since these emotions are unpleasant, we want them to go away as quickly as possible. On the other hand, confidence feels good, and we want to hold on to that.
Inside ETFs: How would you sum up how investors and advisors should look at emotions and apply them to their decisions?
Shull: It’s a data point and nothing more. That said, it takes several data points to make any decision, and that’s where the ability to identify, label, separate, organize and categorize their feelings will really aid investors in their decision-making process.
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