Whenever markets move drastically and the media is promoting fear, it is best for investors to take a step back and ask themselves a few reflective questions. Reflective questions are a powerful antidote to making knee-jerk, hasty decisions.
- What has changed? What has changed other than the price of a stock and news story of the day? Did the company suddenly become less profitable? Are people shunning deodorant, restaurants and iPhones?
The intrinsic value of the company hasn’t changed. What has changed is how other people value the stock, the news story of the day and our perception of risk. Oftentimes, we perceive assets becoming riskier when they go down in value. But when a stock goes down in value, it actually has a more attractive valuation than it did yesterday.
Perceptions, valuations and news change often, sometimes on a dime. Financial decisions should be made based upon an enduring plan, not things that frequently change.
- Am I investing or speculating? Many investors confuse investing and speculating. Are you investing in a company or are you speculating on the stock price of a company (or index of companies)? There is a big different between the two. If you watch the market often and are impacted to make moves based on recent outcomes and forecasts, then you are speculating, not investing.
Investing is difficult. It requires discipline to a plan and self-control. Investing requires us to temper our emotions and oftentimes do things that run counter to our intuition or feelings.
- Why am I diversified? You own a diversified portfolio. Why is that your preference? If stocks went up in perpetuity and encountered no pullbacks, corrections or bear markets, we wouldn’t be diversified.
We are diversified because we know at some point there will be pullbacks, bear markets and recessions. But we don’t know what will trigger them, when they will occur nor how long they will last. We account for that uncertainty in your personal investment plan.
When markets are smooth and moving up, it is easy to be an investor. But when times become volatile, investing is extremely difficult. We have emotions and mental shortcuts that influence us to make poor decisions. I understand it. I get it. I feel it. But there are antidotes to help investors make the best decisions. And that is what I provide to my clients.