With the approach of Valentine’s Day, it is a good opportunity to reflect upon matters of the heart as applied to investors.
As a university professor, I have the pleasure of attending graduation ceremonies on a very regular basis. At nearly every commencement that I have ever attended, the speakers’ messages can be summed up in the familiar refrain: “Follow your heart!” This message is certainly wise and insightful counsel for the young graduates as well as for their family and friends in attendance. For example, when considering a vocational path, “follow your heart” makes good sense as you don’t want to be stuck in an unfulfilling career path. Likewise, when making important decisions about educational, geographical, avocational, relational, and many other questions, it seems reasonable to follow one’s heart. Yet in the world of investing, “follow your heart” may not only not be helpful, it may actually be harmful. In fact, when making financial decisions, a better guideline might be: “Listen to your heart . . . and then do the opposite.”
In fact, when making financial decisions, a better guideline might be: “Listen to your heart . . . and then do the opposite.”
The Bible contains hundreds of references to the heart, but these passages often describe the heart not as a guide, but as something that itself requires direction. Matthew 6:21 and Luke 12:34 teach that the heart follows one’s treasure. 2 Thessalonians 3:5 asks that the Lord may “direct your hearts to the love of God and to the steadfastness of Christ.” Further, Luke 1:17 describes “the spirit and power of Elijah to turn the hearts of the fathers to the children, and the disobedient to the wisdom of the just”. Scripture places great weight on the heart, yet also recognizes its limitations. Jeremiah 17:9 gives a sobering assessment: “The heart is deceitful above all things, and desperately sick; who can understand it?” With this in mind, simply “following your heart” may not be the wisest course, especially in financial matters.
Investors often rely heavily on emotion as a compass for decision making. They may feel good about the market or have a “gut” warning about conditions ahead. When stocks fall, fear tends to take hold; when stocks rise, optimism can become unrestrained. Yet decades of data show that investor sentiment is a notoriously poor predictor of future market performance. In fact, many analysts view it as a contrarian indicator. The longest-running weekly measure of investor sentiment, conducted by the American Association of Individual Investors (AAII) since 1987, illustrates this clearly. A 2013 report by AAII about its own sentiment survey concluded that “extraordinarily low levels of optimism have consistently preceded larger-than-average six- and 12-month gains in the S&P 500.” In the field of Behavioral Finance, such patterns are classic examples of emotional decision making going exactly the wrong way; proof that following one’s heart can be costly in the investing arena.
In summary, intentionally direct your heart toward the love of God and the steadfastness of Christ. Trust it in those areas of life where doing so is wise and appropriate. But when it comes to investing . . . don’t listen to your heart!
Dr. Erik Davidson, CFA, CTFA is the Chief Economic Advisor for Inspire Investing. Previously, Dr. Davidson served as the Chief Investment Officer for Wells Fargo Private Bank, overseeing more than $200B in assets. Dr. Davidson holds a doctorate degree from the DePaul University’s Kellstadt Graduate School of Business with his research focus in Behavioral Finance.
With the approach of Valentine’s Day, it is a good opportunity to reflect upon matters of the heart as applied to investors.
As a university professor, I have the pleasure of attending graduation ceremonies on a very regular basis. At nearly every commencement that I have ever attended, the speakers’ messages can be summed up in the familiar refrain: “Follow your heart!” This message is certainly wise and insightful counsel for the young graduates as well as for their family and friends in attendance. For example, when considering a vocational path, “follow your heart” makes good sense as you don’t want to be stuck in an unfulfilling career path. Likewise, when making important decisions about educational, geographical, avocational, relational, and many other questions, it seems reasonable to follow one’s heart. Yet in the world of investing, “follow your heart” may not only not be helpful, it may actually be harmful. In fact, when making financial decisions, a better guideline might be: “Listen to your heart . . . and then do the opposite.”
In fact, when making financial decisions, a better guideline might be: “Listen to your heart . . . and then do the opposite.”
The Bible contains hundreds of references to the heart, but these passages often describe the heart not as a guide, but as something that itself requires direction. Matthew 6:21 and Luke 12:34 teach that the heart follows one’s treasure. 2 Thessalonians 3:5 asks that the Lord may “direct your hearts to the love of God and to the steadfastness of Christ.” Further, Luke 1:17 describes “the spirit and power of Elijah to turn the hearts of the fathers to the children, and the disobedient to the wisdom of the just”. Scripture places great weight on the heart, yet also recognizes its limitations. Jeremiah 17:9 gives a sobering assessment: “The heart is deceitful above all things, and desperately sick; who can understand it?” With this in mind, simply “following your heart” may not be the wisest course, especially in financial matters.
Investors often rely heavily on emotion as a compass for decision making. They may feel good about the market or have a “gut” warning about conditions ahead. When stocks fall, fear tends to take hold; when stocks rise, optimism can become unrestrained. Yet decades of data show that investor sentiment is a notoriously poor predictor of future market performance. In fact, many analysts view it as a contrarian indicator. The longest-running weekly measure of investor sentiment, conducted by the American Association of Individual Investors (AAII) since 1987, illustrates this clearly. A 2013 report by AAII about its own sentiment survey concluded that “extraordinarily low levels of optimism have consistently preceded larger-than-average six- and 12-month gains in the S&P 500.” In the field of Behavioral Finance, such patterns are classic examples of emotional decision making going exactly the wrong way; proof that following one’s heart can be costly in the investing arena.
In summary, intentionally direct your heart toward the love of God and the steadfastness of Christ. Trust it in those areas of life where doing so is wise and appropriate. But when it comes to investing . . . don’t listen to your heart!
