Last week as the market was in retreat I gave a talk to a group of investors. The talk was scheduled a while ago so it had nothing to do with the recent downturns in the market; however, that was what was on the mind of most people. After a variety of questions on the reasons for the recent downturn, I was asked what an investor should be doing to react to these downturns. She told me she was confused because some people on TV were touting this as a great buying opportunity, while others were talking doom and gloom suggesting that investors ought to be bailing out of the market. She went on to say she knows she should be doing something, she just doesn’t know what.
My first question was why she thinks she has to do anything. One of the mistakes investors make is thinking that every time there’s a market gyration, up or down, they ought to be doing something. My general view is when markets are volatile it is probably the worst time to do something. As I’ve always said, over the short run markets are irrational; good news is bad news and bad news is good news. The average investor tends to think everyone else is smarter than them and if everyone is doing something, they ought to be doing something as well. In reality, that is not the case. All too often when markets are volatile, investors don’t act rationally; rather, they let fear and greed dictate their investment decisions. As I have said many times in the past, whenever investors let fear and greed enter into their decision-making process, they’re going to make the wrong decision. In today’s fast-paced world, things can turn around relatively quickly and thus, for many investors, probably most investors, when going through times of extreme volatility, in most cases the best course of action is to do nothing.
I’ve always preached that investors need to maintain balance and diversified portfolios and have a discipline about investing. That discipline about investing includes regularly rebalancing your portfolio. By having a game plan where you occasionally rebalance your portfolio, it assures you that your portfolio which should be based upon your goals and objectives is always intact. That doesn’t mean by rebalancing your portfolio you won’t have times during market contractions when your accounts are adversely affected. Unfortunately, that is part of being an investor. However, over the long run, which is something we should all be focusing on, you will be in much better shape than an investor who tries to react to every speed bump along the way. For some reason too many investors believe that market corrections and market downturns are the aberration. In fact, nothing could be further from the truth. Market corrections and downturns are frequent and the aberration is when they don’t occur. Just because the talking heads on TV like to make everything into a crisis, doesn’t mean you should believe them. I somewhat analogize to weather here in Michigan. You would think when we have a winter storm it is the aberration as opposed to the norm. Whenever it appears we’re going to have inclement weather, the local weather people make it out that it is going to be the storm of the century. If you were a small business owner and you closed your business every time the local media broke in with a weather advisory, you would be out of business. We all have to recognize that the current state of affairs by our media tends to overhype things.
That doesn’t mean I think the markets are all rosy and there will not be some difficulty over the near term. However, once again, that doesn’t mean you should be making radical changes in your portfolio. Investors who have an emergency fund, who keep their portfolios balanced and diversified based upon their individual goals and objectives, are in the best position to ride out the storm. That is why it is important before you start investing to have a game plan and to have the discipline to stay with it. I recognize that during these times it is difficult. No one likes to see their investments go down, me included. However, when something goes down in value you only lock in the when you sell.
I urge you during these turbulent times to not panic and not believe the world is coming apart. Is there turmoil in the world? Of course there is; however, I think if you look back in history you will see we always have turmoil and disruption. The main difference between today and the past is that we know more about it today than we did in the past.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at email@example.com.