Broker Check


February 24, 2022


By Peter T. Waldron

Managing Partner of Waldron Partners

The aim of the wise is not to secure pleasure, but to avoid pain. – Aristotle

            While time is the great equalizer of fortunes, it is thought and reason that can stand the test of time. In these unprecedented times, fear has driven a lot of decisions. These actions have resulted in outcomes that were defined by emotion, not logic. Planning involves logic and thought, which leads to well-informed decision making. This month, I will tackle the idea of pain avoidance, the actions that occur as a result of it, and how planning can breed confidence and success.

            We must first understand fear, which is defined as an unpleasant emotion caused by the belief that someone or something is dangerous, likely to cause pain, or a threat. It is the fear of pain that drives most people to make decisions that lack logic. It is logical that if a bear is attacking you, you should run. However, in your financial life, fear can drive illogical decisions that aren’t rooted in reason. It is extremely difficult to delineate between right and wrong when you do not have enough or accurate information. Most people presume risk or fear of loss when there is market volatility.

            This fear of loss leads people to act irrationally. While these acts seem to create a loss avoidance benefit, most actions are taken when the loss has already occurred: the age-old adage of buy high, sell low. When confronted with the reality of the poor decisions, human rationale leads to justifying the actions. While that justification seems logical, it is usually an illustration of the fallacy that timing the market is a high probability outcome and that there is still more downside protection. What if the action wasn’t necessary and you could still derive the outcome of loss protection?

            What is loss protection in the financial markets? Plainly, it is the ability to achieve your objectives with a high degree of certainty. While you can’t control the markets, you can test a variety of different strategies to understand which one helps you achieve your objectives. An example of a tested objective would be your ability to retire on time. If you have all your money in a concentrated position and that position went down by twenty percent, how did that impact your ability to retire on time? Even worse, you then sold that position to avoid further loss, the market rebounded, and you didn’t get back in on time, missing all the recovery. Wouldn’t a more logical or rational approach be to understand your return need and then set volatility, return, income, and tax expectations for the money you are investing?

            From that point of understanding, you could then determine how (based on historical information and expectations) your portfolio would react given the predetermined expectations. If you knew that your portfolio would go up and down and you could still achieve all your objectives, would that reduce your fear? What about if you knew what pain you could expect and, more importantly, if you could determine the pain tolerance you can handle? Understanding the potential outcomes of the market before they happen will increase your ability to employ logic and reason in times of extreme volatility.  

            The financial world will always encompass pain and fear; that is something you must adjust to living with when it comes to your finances. Understanding your pain tolerance and how the pain will impact your ability to achieve your financial objectives will lead to greater confidence in your planning. The other desired outcome is that it will give you the ability to refrain from irrational and emotional decisions. The ability to think and act rationally will allow your fortunes to grow and stand the test of time.

If you know the enemy and know yourself, you need not fear the results of a hundred battles. – Sun Tzu


Peter T. Waldron: California Insurance License #0E47827

Peter T. Waldron is a registered representative of Lincoln Financial Advisors, a broker/dealer, member SIPC, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor, Waldron Partners, 3201 Danville Blvd., Suite 190 PO Box 528 Alamo, Ca 94507.  Waldron Partners is not an affiliate of Lincoln Financial Advisors. Insurance is offered through Lincoln Marketing and Insurance Agency, LLC and Lincoln Associates Insurance Agency, Inc. and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was provided to you by Lincoln Financial Advisors Corp. for its representatives and their clients.  CRN3093732-051920