Don’t Ignore Financial Emotions. Instead, Plan for Them.

In Homer’s Odyssey, the hero Odysseus is trying to get back home with his ship intact. At one point in their journey, he and his crewmen must pass near the rocks of the sirens. These are creatures with the bodies of birds and heads of women who sing magically enticing songs that cause men on passing ships to leap overboard to their deaths.1

Odysseus prepares for his passage near the sirens by having all his men stuff wax in their ears. But being curious, he wants to hear the famous song. So, he has his men bind him securely to the ship’s mast. As they row past the sirens, Odysseus struggles desperately to free himself. But his men do not untie him until they are safely out of earshot.

We now use the term “siren song” to describe any strong temptation that leads to our own harm.

Ben Carlson, an investment manager and noted financial blogger, has used this term to describe the urge to “time the market”—jumping into or out of an investment with the aim of making a quick profit.2

The siren song of market timing is the strong emotions that come with winning and losing. If you happen to get lucky, you get a feeling of satisfaction that’s strongly addictive. On the other hand, if your gamble sends you into the red, you experience an even stronger emotion—the sting of loss. Unfortunately, the natural response is to immediately try to get rid of this terrible feeling by rolling the dice again.

Carlson has observed among his clients that the siren song is especially loud when an investor has a lump sum that they want to add to their portfolio. Mathematically, if you’re going to stay invested for more than 5 years, it makes sense to invest lump sums whenever you’re fortunate to have them. Many folks split the difference and choose instead to use dollar cost averaging to put the new dollars to work in equal amounts over a specified time.

But when you have a sizeable sum to add to your retirement account, it’s tempting to think about how much you could make instantly if you buy in at just the right moment. You say to yourself, “What if I just hang out in cash for a while to see if the market pulls back 5-10%? There’s no harm in that, right?”

“The problem with this mindset,” says Carlson, “is eventually that you turn into Gollum (from Lord of the Rings) and the cash is your Precious.”

A multitude of studies have shown that attempting to time the market is a behavior that costs the typical investor a significant percentage of potential return over the long-term.3

“This is why the best investing plans,” writes Carlson, “make good decisions ahead of time so you don’t allow your emotions to take the steering wheel at the worst possible times.”

There are times when it is appropriate to rebalance and reallocate your investments. But this is best done in partnership with your trusted advisor, who, like Odysseus’s crewmen, can help you avoid making a self-defeating decision in response to strong emotions.