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.
This blog is provided by Windward Private Wealth Management Inc. (“Windward” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this blog is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in the individual blog posts will be derived from sources that Windward believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
Windward is an SEC registered investment adviser. The Firm may only provide services in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about Windward’ registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.