Author: Brent Lemieux CFA® CPA
In his 1949 book, “The Intelligent Investor” (the best book ever written on investing according to Warren Buffett), Benjamin Graham created a fictional character named Mr. Market. Mr. Market is a remarkably accurate human representation of the stock market and therefore suffers from bipolar disorder. When he’s in a good mood and the market is up, he wants to BUY! BUY! BUY! But when the market starts to go down, he is gripped by fear and wants to SELL! SELL! SELL! This characterization almost perfectly encapsulates day to day and intraday market moves. Without any seemingly new and useful news, the market can swing back and forth, sometimes wildly.
How are we to react to this? In more extreme (but not rare) instances, we feel fear or greed. Our first instinct is to act just like Mr. Market. However, history has shown time and time again that this will likely lead to a sub-optimal outcome. Mr. Market wants to buy high and sell low. When thinking rationally, we know we want to do the opposite.
So how do we guard against our emotions and protect our future from our lesser selves? We must use reason to overrule our emotions or put barriers in place that will keep us from feeling negative emotions. Since I’m no philosopher I can’t provide good advice on how to rule over our negative emotions. However, I can suggest a number of practical strategies that we can use to place a barrier between ourselves and the wrong decision.
Don’t look at your portfolio regularly.
When the market gets rocky it can be difficult to take our eyes off of our investments. We check our balance(s) incessantly as if we can change what is happening. However, we know we can’t control the market and constantly checking during bad times makes it more likely that we will make an emotional mistake. I suggest setting up a solid, well-thought-out investment plan and then forgetting about it. There is no need to check on our portfolio more than a couple of times a year, if that. Instead of constantly checking in on our investments, we should focus on our families, friends, jobs, or hobbies – the things we can control.
Don’t pay attention to financial journalism.
It’s important to remember that the media is in the business of getting your attention, not providing you with sound advice. Not letting a crisis go to waste, the media takes full advantage of market swings by producing sensational opinions and stories that take advantage of our emotions. As anyone who reads financial newspapers knows, one day they will provide an explanation for why the market is up and the next day they will use the same explanation for why the market is down. It would be quite comical if millions of people weren’t relying on them for information.
Make your portfolio more conservative now, before another crisis hits.
If you think a 50% drop in the S&P 500 would cause you to sell all of your investments, you might consider reducing your equity exposure today. Big drops happen. We can’t avoid them. It’s what we sign up for when we invest in equities.
Hire an advisor.
A good advisor probably can’t help your portfolio avoid large drops during a market crisis. What they can do is act as a barrier between you and the wrong decision. When you’re panicking and want out of the market, your advisor can be the voice of reason, urging you to ride it out. Carl Richards, author of The Behavior Gap, and an advisor himself, explains why he hired an advisor here.
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