As dentists go through their day performing a multitude of tasks, some menial and some intense, it is almost a sure thing that their minds wander from time to time to their investment portfolios. What do they think about? Newspaper headlines; the latest corporate scandal playing out in the media; do I have enough to retire; I feel very nervous; I should make a trade today…
All of these thoughts are, of course, normal and expected. What really matters, however, is what you do about them. Even portfolio managers are prone to acting on emotion. So here is a list of suggestions on how to handle the various triggers that tend to set off investors’ emotions.
HeadlinesTrading on headlines can be disastrous. Last year’s Brexit vote and Donald Trump’s election victory are classic examples. The polls, newspapers and bookies were pretty much in agreement that Brexit would fail and that Hillary would win. Investors who went with the emotional trade in the early hours after those events missed solid market rallies in the ensuing days and weeks.
Yesterday’s StoriesLingering tales of China, Japan and Europe as poor places to invest have encouraged investors to avoid diversification in those areas of the world. In recent months those countries’ stock markets have been some of the world’s best performers.
Trading for No ReasonOften investors get impatient after prolonged periods of market dullness or inactivity. Primarily this feeling of having to do something results from a listless market that elicits feelings of doom or collapse, and hence the desire to sell. This is once again allowing emotion to trigger an investment response that is not usually advisable. The most recent period of very low volatility occurred from December 2016 to January 2017. After the initial “Trump Rally”, much of the media debate centred on whether the market was due for a correction. Selling during this period resulted in missing new market highs only days later.
Chasing the New ThingThis emotional trade results from an uncontrollable urge to get in on the newest fad. Technology stocks in 1999, uranium stocks in 2005, rare earth stocks in 2010 are some examples. The current one is marijuana stocks. Typically these involve a previously unpopular/unknown sector that is thrust into the mainstream by a sudden awareness of spectacular stock market performance and a growing view that the world needs what is in acute shortage. The first unfortunate thing for most investors is that by the time it becomes mainstream, the stocks involved in the early stages have increased 5 or 10 fold. The second unfortunate thing is that by the time the average investor decides to buy in, more companies have entered the business, the demand for the product declines, the commodity price drops and the stock prices rapidly retreat.
Short Term ThinkingThis is perhaps the worst enemy of fruitful investing and the embodiment of all those above. It is also the one that can be the most difficult to overcome. This particular trait shows up on both sides of the trade. The desire to sell now to avoid trouble or to buy now to make the big payday can become so powerful as to render all rational thought secondary. All we know about long term consistent investing as the key to building wealth can fly out the window in the face of the fear of losing money or the exuberance of making the big killing.
So when the headlines are screaming about economic woes, political scandal and impending doom, or if things seem so good all your friends at cocktail parties are raving about how much money they’re making in the market, it would be a good time to step back, take a deep breath….and do nothing. If your investments are organized, diversified and monitored properly, most of the above will not be of concern to you. Your investment portfolio will, of course, move up and down with the markets on a daily and even weekly basis, but over time, the lack of drastic action at the wrong time will stand you in good stead.