Question: What is going on in the markets right now?! I don’t know what’s happening but I don’t want to see my account go down like this. Do you think now is a good time to sell?
Answer: Indeed, it seems Mr. Market is has stopped taking his medication and is throwing a tantrum again. What’s going on?
On the afternoon of Monday, Feb 5th, the Dow Jones Industrial Average made its largest single-day point drop ever in history. The Dow tanked nearly 1,600 points during trading hours, finally closing the day down 1,175 points.
Before we go any further, let’s put this in perspective. In percentage terms, Monday’s 1,175 point drop was a 4.6% loss.
That’s certainly not insignificant, but the reality is that a 4.6% on the Dow doesn’t even make the Top 20 list of one-day losses. That title goes to “Black Monday,” October 19th, 1987, when the Dow lost a whopping 22.6% on a single day.
Ok, so what do we do about it? More importantly, what can we do about it? The short answer is, of course, nothing. It’s in the past – it already happened. There’s really nothing anyone can do about it. But that’s only half the story. In reality, there’s likely nothing you should do.
Be Like Buffett
Not Jimmy. We’re talking about Warren. One of the toughest aspects of investing preventing ourselves from making hasty investment decisions in volatile markets.
Warren Buffett famously said, “To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.”
Indeed, when it comes to investing, our emotions are our own worst enemy. How we can stop ourselves from making kneejerk reactions and abandoning our investment portfolios at times like this?
3 Key Questions
Ask yourself these 3 questions:
- Have your goals changed since last week?
- Has your time horizon changed since last week?
- Has your financial plan changed since last week?
If the answer to these questions is “no,” then you must now ask yourself another question: If those things haven’t changed, why should your investment portfolio be changed?
Stated another way, if your investment portfolio is appropriate for your individual goals and circumstances, changing it would therefore mean it’s no longer appropriate for you.
So what should you do? In short, you should do nothing.
Doing nothing… It’s harder than it seems
The market turmoil… it’s on TV, it’s in the news, it’s on the radio, and it’s in the papers. How are you supposed to do nothing? As most people can attest, at times like this, doing nothing is definitely not easy. In fact, it’s actually quite difficult.
This is not unique to investing. The reality is, most people prefer to do something rather than nothing, even if that something is negative.
Case in point – researchers at the University of Virginia in Charlottesville recruited hundreds of volunteers, and asked them to simply sit in a room alone with their thoughts for 15 minutes. The researchers left them alone in a lab room, which was empty except for a button they could push and give themselves an electric shock if they wanted to.
The results were shocking (pun intended): 67% of men and 25% of women chose to electric shock themselves rather than just sit there and do nothing.
Doing nothing really is much harder than it seems.
Not that we’re suggesting you shock yourself, but this is where the rubber meets the road. How do you prevent yourself from abandoning your investment portfolio, when you so desperately want to do so? That is, how do you make yourself do nothing, when nothing is the right thing to do?
Thankfully, you don’t have to make these decisions. We do. But of course, we’re not you, and we’re not susceptible to your emotions. That might sound obvious, but the fact is, managing your own money is simply too personal, too emotional. That’s what makes it so hard to do the right thing, even when you know it’s the right thing. And that’s also why it’s so important to have an impartial, independent portfolio manager.
This critical issue should not be underestimated. Even seasoned investment professionals are typically much better off having someone else manage their investments. Not because they don’t know what to do, but because even when they do know what to do, sometimes they just can’t make themselves do it.
Stay invested – It’s a packaged deal
It’s possible that you could avoid the volatility of the stock market altogether. GICs for example would completely insulate you from whatever discomfort you’re currently experiencing. Of course, you’d also be insulated from earning any kind of meaningful rate of return on your money as well.
The reality is this: If you want the growth potential of stocks, you have to be willing to accept the volatility of stocks. To wish for volatility to “go away,” is to wish for your investment return to be lower. It’s a packaged deal, and you can’t have one without the other.
Of course, there’s one easy way to capture every single upswing in the markets – stay invested all the time. Sounds simple, but of course, this is much easier said than done. Because it also means sitting through hefty declines from time to time, just like the one we’re experiencing right now.
Again, to quote Warren Buffet, “Investing is simple, but not easy.”
The ModernAdvisor Advantage
So how do we do it? We manage every client portfolio in accordance with the investment policy statement (IPS). The IPS governs the account – not the day to day noise in the markets and the media. Your portfolio is designed by a CFA Charterholder, and is already adjusted based on your goals, risk tolerance, and time horizon.
If you’re feeling anxious about your investments due to the recent volatility in the stock market, remember this: your portfolio is already properly diversified, and has the right asset allocation to achieve your long-term goals.
Furthermore, if the recent market volatility has caused any portion your portfolio to stray from its target weighting, rest assured it will be re-balanced back to the desired allocation. When any one of the investments in your account is more than 5% away from its target weight, we will automatically rebalance the portfolio back to where it’s supposed to be, as spelled out in your IPS. Everything is taken care of automatically. At ModernAdvisor, we have a fiduciary duty to our clients, and that means we’ve got your best interest in mind with every decision we make.
Volatility, even extreme volatility like we’re experiencing right now, is a normal part of investing in global financial markets. If your investment portfolio is properly diversified, and properly aligned with your long-term goals, there will be very few times when it should be altered. You must avoid tinkering with the plan or micromanaging it, no matter how strong the temptation. Sometimes we just need to be reassured “it’ll be ok,” regardless of whatever temporary decline we’re currently going through.