“Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.”
-Warren Buffett If you are going to be a savvy investor in the markets, you will need to become comfortable in the fact that daily stock price movements sometimes seemingly lack reason. The truth of the matter is, no one knows how the next market move will affect your portfolio. Some intelligent analysts will appear on TV sounding sure that the market is facing a steep decline and, after the commercial break, an equally credentialed expert sees buying opportunities. It is important to remember that differing opinions are what make a market function. Every time you sell an investment you believe is fully valued, someone else is buying your investment thinking there is room to grow. The price of an investment is the price at which the number of buyers and sellers are equalized. As sentiment and expectations shift, so do market prices. I believe the question to ask is, “Do I understand the investments I own, and am I allocated properly to achieve my financial goals?” By asking these big picture, yet very personal questions, you will largely avoid the temptation to time market movements. Market timing has the potential to be one of the most destructive strategies to attempt with an investment portfolio. First you have to be correct when you sell, otherwise the market moves higher and you miss the continued rally. Secondly, you have to somehow know the correct time to buy back into the market before the next rally begins. Not only do you have to be incredibly correct TWICE, but you also will have to overcome the trading costs, commissions, and taxes that these transactions will incur.
After the experience we had in 2008, it is natural to think increased volatility is going to usher in a repeat performance. History shows that events like 2008 do not occur with great frequency. History also shows that every past decline has been eventually followed by new record highs. Smaller 10-20% market fluctuations do happen with regularity and if you are going to be an investor these will need to be expected and tolerated rather than “timed”. I still see investors on the sidelines from selling in 2008, sitting in money market or CD accounts earning very little interest. They did not participate at all in the recovery. How can that get you to your retirement goal? Statistically, the cost of being out of the market recovery has been much higher than the price of holding through the crises.
It may be helpful to go through this checklist if you are feeling unsure about your investments or the overall market outlook:
Do I understand the companies I own and am I satisfied that the products and services they provide have a durable demand?
If the market declines substantially, are my investments allocated so that my short-term financial needs can be met without selling my stock positions?
In past market corrections, how did I react? What can I learn from that experience?
If you work with an advisor, schedule a review and use them as a sounding board for your concerns. I can assure you, if you are an investor, you will experience declines that can be uncomfortable and occasional. Warren Buffett once said, “Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.” Focus on understanding your portfolio and your financial needs and push the daily market “scoreboard” to the side.