By our very nature, we are emotional creatures. Yes, even you guys get emotional! If you are not convinced, watch a close scoring football game, or better yet, a high school lacrosse match.

Most of us view our negative emotions as a call to action. If our children are unhappy, we want to make them happy. If someone close to us is sad and crying, we want to cheer him or her up. If we are afraid of something, we suppress the fear and pretend it isn't there.

On the other hand, I have never seen a mother try to control her child's enthusiasm or happiness. Laughter is wonderful medicine. We dance, clap and sing to our favorite music. We celebrate and enjoy positive feelings. They feel good and we seek to expand our positive emotions.

Why do we see negative emotions as a call to action, suppression or avoidance? We were not born this way. In a recent investment management meeting with a young mother and her 6-month-old baby, I was reminded of just how spontaneous and in-the-moment babies can be. As we went over her portfolio analysis and details like investment performance, beta, alpha and asset composition, the baby cried, laughed, and smiled. Quite a range of emotions for a one-hour meeting!

What I learned, or re-learned, from this child, is that she did not need to fix her feelings. She just felt them. She did not make them positive or negative, good or bad. They just were. She made no life-altering decisions in her moments of high emotion.

What does this have to do with investing? Everything! When the market goes down, we feel fear, which is one of the feelings we have classified as negative, and it becomes an emotional call to action. We may sell our investments to protect ourselves, fire our financial advisor because "they should have known," or hide our head in the sand and pretend it's not happening. All of these are emotional reactions to feelings of fear ...and none of these are actions that create resolution or restitution.

What to Do When the Market Drops

We know that investing is a long-term process. We know that the stock market goes up and down. When we are making an investment decision, we are analytical. We see the historical market returns, and we focus mostly on the positive ones. We look at the negative ones and say, "The market always recovered." But what we often fail to consider is how will we process the feelings and emotions that come when the market drops?

The challenge comes when we have a declining quarter, like the most recent one, and we actually have to look at our statement and see that we have a smaller aggregate portfolio value than we did three months ago. Can we stay focused on the total picture? Can we know that our investment strategy makes sense and there is no need for panic? Can we feel the fear and stay the course? Can we resist the urge to make a decision based on our emotions? Can we learn what the 6-month-old already knows and simply feel the emotion? Not labeling it negative or positive, good or bad.

Unfortunately, many folks do not. A recent study by Dalbar, Inc. found that the average investor chases market returns. That is, they buy high and sell low. As a result, their study shows that the average equity mutual fund shareholder earned a paltry 3.51 percent annually, compared to 12.98 percent of the S&P 500 index over the period of 1984 to 2003.

What this tells me is that we use our emotions as a call to action. When the market is going up, we feel positive emotions of joy, happiness, success, and we buy, buy, buy. When the market is going down, we feel negative emotions, like fear, anxiety and unhappiness and we sell, sell, sell.

Emotions Create Mayhem

What specifically do you need to do if you find yourself in this buy-high-and-sell-low, emotional roller coaster?

First, get a plan. Take inventory of what you have, where you are and where you want to go. Develop an investment plan with an asset allocation model, savings plan and investment strategy that targets the results you want with a minimum of risk and volatility.

Second, get more education and/or hire an advisor. Unfortunately, few of us were lucky enough to get a functional, financial education. And even if we did, we often need guidance.

Lastly, few of us have any business investing just in one asset class, like the S&P 500. Instead, we need to use the principles of asset allocation and diversification to smooth out the bumpy ride of investing. These tools don't guarantee a positive year every year. But history shows that they do lower overall portfolio volatility, easing the roller coaster ride.

Reprinted from The Sunday Challenger, Mackey McNeill, June 5, 2005