The situation in Europe is clearly being felt far from the kitchen in which the fire started. As the smoke continues to billow from the financial headlines, investors are left wondering which way to turn in an already blurry economic environment. Investors are scrambling to find safety. In the midst of opinions and recommendations flowing from every media outlet, what is seemingly going unnoticed is the often overlooked impact to the investor’s bottom line caused by reactionary investing. Like self-inflicted burns, the investment returns forfeited by unsuccessfully trying to time the market compound the problem of market declines.
Investors are trying to control the fire themselves, but many seem to be making matters worse by acting in the wrong way at the wrong time. Often, financial professionals meet with clients who have gotten into trouble simply because they tried to get themselves out of trouble. At the time, liquidating and going to cash may have seemed like the right thing to do, and if nothing else, it definitely felt like the right thing to do. However, the market doesn’t reward those who act on feeling. Time and time again, the markets reward those that are slow to react out of feeling and emotion. All too often, changes to one’s investment portfolio are made at inappropriate times. As a result, portfolios suffer from poor timing and poor planning. Simply waiting for a reason to react isn’t a plan; it’s a recipe for disaster. Investors need to set investment disciplines for how their money will be managed. If those disciplines aren’t in place, they will be influenced by the loudest market sentiments and investor herd mentality.
Take the month of October for example. This year, in October alone, the S&P 500 rallied almost 11%. That’s following on the heels of a quarter in which it fell roughly 14%. July, August, and September left investors dazed and confused as to what was next on the horizon of uncertainty. One might look at the rally of October and come to the conclusion that over the past 4 months the S&P 500 is really only down about 3%. What those numbers don’t tell you are the stories of investors who over the same time period experienced losses more closely resembling the negative 14% than the negative 3%, because they pulled their money out when the market fell and therefore weren’t positioned to recover when the market rallied. As the start of the 4th quarter, October offered investors an opportunity to regroup and reassess their approach for the end of the year. Some investors who got burned in the 3rd quarter, decided that with all the uncertainty of the markets and Europe, etc., they would flee to safety and wait to see how things panned out. The obvious problem is that they now find themselves burned twice. An investor, who experiences market losses only to then get out of the market, puts themselves in an incredibly difficult position to ever be able to manage and grow wealth long term. Guessing isn’t investing and it isn’t a proven strategy.
A lot can be said for placing an emphasis not only on what you might lose in the short term, but on what you might also forfeit or miss out on in the short term. Investing takes patience and self control. It’s about more than just reacting out of uncertainty. It’s about being purposeful and committed to a plan. Every year the market presents a new opportunity for uncertainty and fear. However, being uncertain and fearful aren’t good reasons to run from those situations. Running from something which we don’t fully understand or haven’t put the time into understanding won’t position us for future successes. Rather, it will in effect pause our present reality. The market is always going to operate out of uncertainty. If uncertainty didn’t exist in the markets, they would never rise or fall. For those of us looking to be long term investors, there will come a point in which we must return to the game. In the case of trying to grow your wealth, being on the sidelines during a period of market growth can prove equally hindering as those periods of being invested during economic uncertainty and market losses.
Many times, it’s more dangerous long term to guess when to be on the sidelines than it is to have just stayed in kitchen.
Buchanan Wealth Management – Securities offered through LPL Financial, Member FINRA/SIPC
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.