There’s an old saying – “Buy low and sell high”. Ironically, investors tend to do just the opposite – buying high and selling low. Why do we do that; and most especially, how can we avoid doing that now with the market lingering on the edge of a huge cliff?
Since we are all human, we do what human’s do- act on emotional, rather than intellectual drives. Let’s say you’re sitting at home and turn on the news. You hear that the market has just plummeted to a new low. What’s your first thoughts? If you’re like most, fear is the first sentiment that takes over. Your heart starts to race a little faster, the neurons in your brain begin firing rapidly, and suddenly you are an emotional roller coaster. What’s then your first reaction, “Get me out of here, I’m going to jump ship!” (that means selling to protect your downside risk). Unfortunately, all too often as you crawl stroke away from the so-called “sinking” ship, you look back and see your ship is still afloat, and in many cases, sailing even better. And all this leaves you confused, discouraged, and a lot poorer for the effort.
By letting emotions control the decision process, we are driven to act too quickly and without sufficient wisdom. Keeping your emotions in check is a key trait of successful investors. To be successful in the investing game, you have to be a stone wall and let logic rule your thinking. To develop this level of awareness along with the confidence to be the stone wall you’d like to be, understanding is key. For example, when you understand what a market cycle is and how it works (that markets which fall have always, and historically come back) then that understanding can replace emotions with wisdom. In this case, the wisdom to ride out the market and all will be okay. All markets repeat cycles. They go up, peak, go down and then bottom. When one cycle is finished, the next begins. So as the markets go up and down, those who don’t understand, the novice investors, buy high and sell low as they succumb to their emotions instead of their wisdom.
Here’s the scoop. A well-diversified portfolio eliminates the need to try and time the market. Which, by the way, all the research says is impossible to do successfully over time. Diversification bypasses emotional thinking. It relieves your stress over market conditions and, over time, typically delivers better results with less overall risk.
Instead of panicking, trying to outguess the market, worrying if you did the right thing and putting yourself through an emotional roller coaster as the market rises and falls, make sure your portfolio is fully diversified and built to weather all the market storms. Now, if you’re not sure if your portfolio is a ship you can sail on in all-weather conditions, let’s get together and I’ll do a portfolio review for you at no cost. Then, when your boat rocks, you will confidently move on with your life instead of living in fear that your ship might sink or crash on the barriers.