Human psychology is not a friend of successful investing.
According to Warren Buffett, "Success in investing doesn't correlate with I.Q. … Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
Unfortunately, humans make the same emotional investing mistakes over and over again. We let emotions trump our intelligence. Buying low and selling high sounds so easy and is probably the most well-known investing cliché, yet people systematically do the opposite.
In February, the Standard & Poor’s 500 index experienced its first 10 percent correction since January 2016. While this is very normal market behavior (the market has historically averaged one 10 percent correction per year), investor emotions have already been tweaked. We thought this might be a good time to review how you should manage your money in the event markets become even more turbulent.
The best advice on how to manage your portfolio in turbulent markets is … not to. Do not trade when you are experiencing fear. Even some professional money managers hire others to manage their own personal money. There is something very emotional about managing one’s own money. If you can’t leave your portfolio alone during volatile times, put it in the hands of someone more capable of handling the situation.
Very adept investors can actually take advantage of an emotional market. Extreme levels of fear are fairly easy to spot in the market, but still few individuals can do what feels like the equivalent of stepping in front of a bus and actually buy more stock when prices have gone down. Spotting market tops is more difficult, as greed can go to unpredictably extreme levels. Alan Greenspan coined the term “irrational exuberance” in 1996, four years prior to the 2000 market top.
Therefore, the best advice is not to try to time the market. This is simply not a winning game. Attempt a more realistic goal and don’t do any panic selling when markets have you rattled. Failing at this goal is a threat to your financial health. Prepare for success by building a portfolio that will serve your long-term goals, yet reflect your own psychological weaknesses. Better yet, hire a professional whose job is not only to manage your money, but coach you through challenging markets.
- Steven Hoffman is the Portfolio Manager at Filbrandt Wealth Management.