In every market pull back, every one of us faces an epic battle with our emotions. Our emotions are often telling us to do something….anything to minimize the damage that is occurring to our portfolios.
Here’s the thing. It’s perfectly normal. As humans, we’re wired for it.
Whenever we encounter periods of stress and adversity, we are wired to search, process, and identify solutions to remedy the problem immediately. Sitting on are hands and doing nothing doesn’t seem to make it to the top of our list.
Here’s an example that I recently faced. One night my family was at my sister-in-law’s place hanging out. Later in the evening my wife and I received what looked like a long distance call so we both thought it was spam because we didn’t know anyone from where the area code came from. We moved along. About a half-hour later I was checking my phone and I saw a number flash up from our home alarm service. Uh-oh. I thought something happened. Ironically I was just at the house to get some PJ’s for the kids and I came back to my sister-in-law's house when I saw the message. I thought, “did I leave the door unlocked? Did the door blow open and someone ran in ?” I had a variety of emotions go through me and all of them were involving panic. I told my wife who then proceeded to ask me if I left the door open or if I activated the alarm. All these questions meant nothing to me at that moment because potentially someone could be in my house trashing it. I was asking my wife what should we do because clearly I didn’t have my wits with me. We needed to do something. So we called the alarm company and indeed the alarm went off and police were being dispatched. I bolted back in the car and drove like a crazy guy back to the house. I got there. Nothing. The door was closed and locked. I opened the door and inside I could see these balloons from my son’s birthday party float around the house. It must have tripped the motion detector. We were able to cancel the dispatch to the police. All good.
What happened here? I incurred a stressful, emotional moment and instead of staying calm (like my wife), I was jumping around looking to do something because in a way I was feeling helpless and not in control of the situation. This happens to us constantly in investing. When the markets or a specific stock or ETF falls, we feel we have to do something. Sell some of it. Sell it all. We need something to go down to help us regain our security.
The reality is times of market stress are times to fully reinforce and execute your investment ideology and investment plan. Instead of feeling woe on the 500 drop in the Dow Jones Industrials, we need to take control of the situation by not “trading” but instead we should be reviewing our Investment Ideology to reinforce the values and criteria we need to implement to make better decisions and we need to clinically and thoughtfully execute our investment plan. Investment coaches are great at instilling this balance and discipline. This concept of being reactive versus proactive is a nemesis to us all.
Another reality is that market pullbacks are the worst time to start running around the house with scissors in your hand. We will most likely make a panicked decision that will often put our portfolio on a worst footing in the long term. This tension is engrained in us and it is so hard to overcome for each and every one of us, yours truly included.
So the next time the stocks in your portfolio are falling collectively and meaningfully (It will happen. Count on it), try to resist that pressure to have to do something immediately. Now I premise this with the exception that if a stock of a company is undergoing a negative Game Changer Moment, and the fundamentals of the business model have truly been impaired then you need to take action to preserve your savings. Just do the homework and due diligence.