Professor says investors' grief over stock losses similar to the sorrow over losing a loved one

How to reach the stage of acceptance

July 09, 2010|By Eileen Ambrose, The Baltimore Sun

You may not see a lot of black armbands or be wearing one yourself. But many of us are in deep mourning — for big stock losses going back to 2008.

And our sorrow is so similar to what we feel after a divorce or death in the family that we're likely working through the five stages of grief, says Andrew W. Lo, a finance professor at the Massachusetts Institute of Technology who has studied investor behavior. The stages for investors are the same as for the grieving: denial, anger, bargaining, depression and acceptance.

"My best guess of where we are right now is somewhere between bargaining and depression," Lo says, "and until we reach acceptance, the financial crisis won't really be over."

The free-fall in the stock market started in the fall of 2008 and hit bottom in March 2009. Even though the market is down for the year and has had some big swings of late, the Dow Jones industrial average ended last week above 10,000, more than 3,500 points above the 2009 low. Yet investors haven't come to grips with losses that erased a big chunk of their retirement nest eggs, Lo says.

How can he tell?

Investors haven't yet returned to their usual level of risk-taking. One sign is the flow of money from stock mutual funds into safer harbors and alternatives, such as gold and commodities, Lo says. Investors might not reach the last stage of grief — acceptance — until next year or longer, he says.

Grieving is fine after a drubbing by the market, but you don't want to be ruled by your emotions so much that you end up making poor investing decisions for years to come.

Major financial losses can cause such long-lasting emotions because we have a deep, complex relationship with money, experts say. For many, money means happiness, freedom or power.

"In our culture, particularly in the United States, so much of our self-worth is tied up with our net worth," Lo says.

Kirk Kinder, a financial planner in Bel Air, agrees that investors are in mourning, but he adds it has been longer than two years.

"It's not just 2008, but it goes all the way back to 2000," when the Internet bubble burst, he says. "After the past 10 years, there is genuine mistrust in the market."

Florida financial planner Mari Adam says her clients have reached the acceptance stage, but haven't forgotten 2008. Many of her clients are executives and small-business owners and are making decisions based on the worst-case scenario. Fearful of losing their positions or orders from clients, they hold back on hiring or buying a car or house, she says.

"It has left a scar on people's psyches, just like the Depression did," she says.

It's good to remember that things can go wrong so you shouldn't take on more risk than you can afford. After all, many people got in trouble with stocks, credit cards and exotic mortgages by forgetting that recessions happen and equity and housing markets can go down.

But you don't want to obsess about the negative to the point that you don't move forward.

So how can you fast-forward to the acceptance stage? Here are some tactics used by financial experts to help clients get over portfolio grief:

Look how far you've come "People tend to dwell on losses. They measure their performance from the peak, not from the start," says John Bacci, a Linthicum financial planner. "If the account went from $200,000 to $500,000, then down to $400,000, they will always say they lost $100,000.

"We try to show them the big picture and how they have done from the start. To a certain degree, the logic works," he says.

Take the long view Many advisers remind nervous clients of investing basics and tell them not to let short-term events derail long-term investment plans.

"Markets go up and go down, and in the long run, markets go up," says Jerry Miccolis, chief investment officer with Brinton Eaton Wealth Advisors in New Jersey.

Even if you got burned by stocks, that's no reason to tuck all your money in a mattress, advisers warn. You need the growth stocks can provide to outpace inflation and reach financial goals, they say.

But these arguments may not persuasive enough.

"Telling people that long-term the market does this or that doesn't do it for people anymore," Kinder says. "I don't think they believe it."

Instead, Kinder tells clients they must have an investment plan and stick with it if they want to attain their goals, even if the market is rocky along the way. "What other choices do you have?" he asks. "People understand that and are willing to go with it."

Take small steps Losses can paralyze investors, leaving them unable to make decisions, Adam says. She encourages them to break out of that by making small moves to improve their finances.

For example, if you don't earn interest on your savings account, consider moving to an online bank that pays about 1.5 percent, she says. Or, with mortgage rates falling, look at whether it makes sense for you to refinance.

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