What Should Investors Do Now About…. ?
What should investors do now about…. (insert the latest stock market headline)?
We continue to suggest that they follow the advice we published the day after the Brexit vote was announced: Keep Calm and Carry On (click the link to read our recommendations related to this 500 + point market drop).
Reflecting on the daily stream of emotional market headlines, maybe we should have titled that piece, Focus on What You Can Control.
Why?
First, the vast majority of the haloed prognosticators you see on CNBC, etc. consistently get it wrong. As I have written about many times in pieces such as Groundhog Day, the accuracy, or maybe I should say inaccuracy, of Wall Street estimates consistently reminds me of the saying, “often wrong, but never in doubt.” To reinforce this point, John Authers of the Financial Times recently wrote the following: “Populations across the world have lost faith in the expert guidance of professional economists.” (click here to read his full piece).
Second, you are likely to damage both your mental state and your portfolio if you make investment decisions based on all too common yo-yo like financial headlines such as the following that regularly appear on my news feeds:
- The ….. Danger
- S&P500 is on Pace for Best Week in …..
- Due to …… Markets are at a Treacherous Junction
Again, insert your latest favorite headline event.
This all reminds me of two headlines that I recently received only two days apart via emails:
- “Wall Street rallies as Yellen’s comments suggest that the Fed is unlikely to raise rates.”
- “Wall Street falls as the strength of payroll data suggest that the Fed is likely to raise rates”
The lesson of those conflicting messages should be:
Remember, “projections are based on estimates” (yes, estimates based on estimates) and “assessments have a considerable amount of uncertainty” (both are direct quotes I received from Janet Yellen, Chair of the Federal Reserve – for more click Why I Don’t Make Market Forecasts).
So, what should you be focused on that is within your control?
Your long-term plan, not the models or projections of others.
I know it’s hard to not get caught up in the emotion of the market, but try to remember the old saying, “investors create 50-year market floods every few years.”
When market floods happen, my firm gets calls asking for our opinion about where the market will go next.
We don’t have a crystal ball, but we are always willing to make this prediction.
Whenever you see large market swings you will see:
- Sensational headlines that are designed to catch eyeballs and sell ads, but that are often not conducive to good investing
- Wall Street, which loves volatility, not missing out on the opportunity to sell a trade or product when emotions are high
- Investors being sold short-term ideas that harm long-term returns
If and when our prediction comes to pass, you might be wise to remember the tag line of the anti- drug public service announcement from the 1980s and “Just Say No“.
To help, below is a graph that illustrates what all investors feel from time to time (professionals included).
Notice that the greatest potential for returns is when you are feeling the most frightened.
We aren’t sure what the next few weeks or months will bring, but along the lines of the picture above, at some point more “alarmed” comments will be published again.
When this happens, try to remember that even though it can sometimes be frightening, if you resist emotion and stick to your long-term plan, the evidence consistently shows that the slow and steady tortoise comes out on top.
In-line with this week’s focus on…. (again, insert the latest concerning headline), as long as you have a well-diversified, long-term plan that is designed to meet your goals, keep in mind the following age-old investing quote from a well known British writer:
“My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate….
Therefore, my merchandise makes me not sad.”
– William Shakespeare, Merchant of Venice
For more on our thoughts, including a more contemporary quote from my then 11-year old son following yet another 500+ plus point market drop, click on the following. It also includes evidence of just how unwise investors’ timing decisions have been.
Staying Disciplined and Avoiding Unforced Errors 