…But they do! The investment industry often fails to remember that people invest their money to grow and that their investments become an extension of their ability to improve, or harm, their futures. While growth is paramount, avoiding devastating losses is just as critical.
Academically, buy-and-hold and strategic investing with a well-diversified portfolio makes perfect sense. However, as Behavioral Science has taught us, people react differently to gains and losses. Often referred to as fear and greed, there are many subtleties to our emotional spectrum. The common denominator is that people cannot handle large losses. We panic, we pray, we react. Most often, investors do the worst possible thing at the worst possible time…they sell at or near the bottom of a bear market or sometimes during much smaller declines.
Emotions can also creep into investment decisions based on external events. Whether it is politics, terrorism or other world events, these rarely play a positive role in deciding what to do in your portfolio. People react stronger to negative news than good news. Today, with political angst at a crescendo, it becomes especially important to resist urges to buy or sell based on outside, emotional news and/or events.
Our new President continues to challenge the press, and the media’s reactive noise is beginning to weigh on the investor psyche. Regardless of your political views, to the world’s stock and bond markets this is just loud noise! From an economic, company earnings and market standpoint, things are pretty good and expectations for improvement are high. Recent economic data has been better than expected and should bolster stocks. In short, regardless of your political views, don’t let political noise, however exacerbated by the press and our new President, cloud your investment thinking.
Markets fluctuate up and down constantly. An ordinary pullback is defined as a 5 to 10% decline. Until a loss exceeds 11%, it is just part of the normal ebb and flow of the markets. The Dow Jones Industrial Average recently broke a new record at 20,000. Where will it go from here? Truthfully, no one knows. But you should be prepared for any market event.