The impeachment inquiry of President Trump.
Unresolved trade disputes and tariffs.
It’s hard to read about bad news in current and world events without diverting a passing thought to how all of this might be affecting our investment portfolios or retirement savings.
Most of us feel the urge to flock to safety when encountering loss or added volatility in investment markets. Our natural inclination is to protect what we’ve accumulated, especially when it seems to be most at risk.
However, those survival instincts that keep us safe in the real world often produce the exact opposite reactions that we should have in the investment world.
Suppose for example that we are at a low point in investment markets, and you’ve experienced some losses in your investment accounts. Chances are that one of the predominant emotions you are feeling at that time would be fear.
Fear is certainly a helpful survival instinct that can help us avoid potential harm or even run away from danger. When we act upon our fears, we take actions to protect ourselves from risk or harm.
When we act upon our fears within investment markets, that usually means selling out of stocks or other equity holdings and moving into cash or fixed-income investments.
The rationale is typically that the investor wants to preserve what value remains in the account, and then once investment markets turn around and start growing in value again, the investor will go back into the stock market.
That sounds like a great plan assuming the investor knew the perfect time to go all-in and completely out of investment markets regardless of his or her emotional state of mind in those key invisible moments.
In reality, most investors who sell out of investment markets during down times often miss out on important trading days producing growth once markets begin rebounding.
Those results are compounded by the duration of a “track record of positive growth” that such an investor desires witnessing before re-investing his or her dollars back into investment markets. By the time that he or she feels it’s safe to re-enter the stock market, many of the short-term gains may have already occurred.
Suppose then that markets continue to rebound and grow steadily. With fear no longer being an issue during stable and growing investment markets, our excitement grows to elation as we can’t seem to plow enough money into the marketplace.
We forget that we might have lost value before. We review our statements proudly but lament not having been even more aggressive for the short-term returns we would have experienced last quarter. The emotion of greed begins to seep into our decision-making and alter our strategy.
Once markets inevitably begin losing value again, an aggressive portfolio will lose value dramatically.
What did fear and greed make us do in this instance?
We sold out of our investments at the bottom of the market cycle. We missed out on rebounding market growth by waiting on the sidelines for certainty. Once value had been fully restored, we invested heavily at the top of the market cycle.
Selling low and buying high is a terrible strategy for making money.
Conceding that a change in our investing strategy needs to occur can be quite a difficult, timely and humiliating process. There’s no need to take this guilt on your personal conscience, but there is a need to address the underlying issue and take appropriate actions.
I urge you to consult a qualified tax and investment advisor to formulate an all-weather investment strategy that can help you stay invested through all market cycles and avoid the guesswork of market timing.