This is always a good time for people to look back on the year and take personal inventory. For investing, the personal inventory often takes the form of behavioral inventory. We cannot control the news, economy or market, but we can control our reactions to external events. So how did you do this year?
We started the year with headlines such as “Investors Have Low Expectations for 2016” and “Bad Week for US Stocks Dims Outlook”. These seemingly prophetic headlines and subsequent sell-off in January and February influenced many investors to head for the sidelines. In early February, we saw headlines such as “Dow Plunges as Investors Retreat”. How worried were you? Did you sell or at least consider selling? Now, the most important part of personal inventory is to be honest with yourself.
The markets recovered from the initial sell-off but remained choppy. That shouldn’t surprise us. The market is volatile by nature. In late June we had the first big surprise of the year. The Brexit. Markets sold off significantly…for two days. But during that time, media pundits were going crazy with speculation and catchy headlines. Did you sell? Did you consider selling? Did you think about putting more money to work?
Now let’s fast forward to the next big surprise of the year. The Trump victory. Mark Cuban prophesied, “I can say with 100% certainty that there is a really good chance we could see a huge correction” if Donald Trump were to win the election. Initially, it appeared Mr. Cuban was right. When it became apparent Mr. Trump was going to win, the Dow Jones futures dropped 800 points. Yet that was very short lived. By the time the markets opened the next day, it had recovered its losses. And have since rallied nicely. So the same news that caused a knee-jerk 800 point overnight selloff has been the fuel for the recent rally. Who would have thought?
And that is really the history of the markets, “who would have thought?” As investors we often like to speculate on what may happen to protect ourselves from market losses and make sure we are well positioned for rallies. Yet, we often get it wrong…who would have thought? This investor paranoia results in anguish and oftentimes reduced investment performance.
As we come up on the season of New Year’s Resolutions, allow me to suggest a few resolutions for investors: (1) Ignore the Media (2) Stop Watching the Markets (3) Trust Your Investment Plan.