“Buy low sell high” – it sounds so simple when you say it out loud. Yet in practice it’s one of the hardest things to do if you let your emotions get in the way.
We tend to view investing through a different lens than many other aspects of life. For example, if we were in Costco looking to buy a new TV, we wouldn’t get upset if a worker came up and knocked 20% off the price. In fact, we’d probably hurry to get to the register, knowing we were getting it at a better price than the day before. So why is that when it comes to investing we often run from falling prices, wanting to own stocks only when the market hits new highs?
We wrote about the lack of volatility in the market at the beginning of 2014, but those tranquil times have been replaced by violent volatility. When we look back at historical returns it’s easy to assume it’s been nothing but smooth sailing since 2008. But our memories as investors are often flawed, since we focus just on the emotionless, raw annual returns and forget all the events that we had to persevere through.
Just over a year ago, Dr. Kent Brantly was flown from Liberia to Atlanta – the first American to return to the U.S. to undergo treatment for Ebola. This brought simmering regional fears to a bubbly global froth about the disease spreading out of control. Stock markets reacted, with the S&P 500 seeing a pullback of more than 7% last fall1. Fear made it hard for investors to focus on the long term.
A study by the investment company Sigfig found that those investors who panicked and trimmed their holdings by 90% or more in the fall of last year had the worst 12-month-trailing performance of all groups2 – losing 19.3% through August 21 compared to a loss of just 3.7% for people who did nothing during the same time period.
So what can help investors stick to their long term plan? Work with an Independent Financial Advisor.
A recent IMCA study found that 92% of investors believe it is important or critical that their advisor help them maintain a long-term investing approach.3 Additionally, 83% of respondents said it was important or critical that their advisor help them stay calm when the market drops. These findings echo much of the research from the behavioral finance field which often points out how we can be our own worst enemy.
We don’t know what the future will bring; the current volatility could persist for a long time, bringing with it painful losses. But whether the worry is Ebola, China, PIIGS, Iran, sequestration or something new, chances are we will get through it. Without an unbiased voice to help keep us on the path to our financial goals, we may succumb to the noise of the markets — believing that the current scare is a reason to abandon our plan and move to all cash, gold or simply head for the hills. It can be hard to remember that when markets get crazy, often the best course of action is no action at all.
By the way, I’m glad to report that Dr. Brantly is doing just fine today — his time horizon now significantly longer than he may have thought possible 12 months ago.