Emotions, Who Needs 'Em?Submitted by Concorde Financial Resources LLC on January 16th, 2018
2017 was a banner year for global stock markets. The headline in today’s (Dec 30th) Wall Street Journal says “The Dow’s Milestone year”. The Dow Jones was up 25.1% (the 4th biggest gain in the last 20 years). Amazon bought Whole Foods this year. CVS has agreed to buy Aetna. Boeing was up 89% this calendar year! Bitcoin went crazy. The Federal Reserve is slowly raising rates. Tax cuts happened in the past two weeks. It’s a busy time, no doubt.
So what’s the takeaway from all this noise? Well for one thing, the stock market is overdue for a pullback. That’s not a prediction, just a statistically true statement. Even if earnings remain strong, the S&P has not had a 10% correction in over 2 years! I think another major takeaway for the everyday investor is to remain emotionless during this time, and for the next time to come. Emotionless? It’s hard to be without any emotion when it comes to our portfolios and our retirement savings, isn’t it? Yes it is. But it’s also a key factor in becoming a wise and prudent investor. Emotions cloud our better judgment. Emotions can lead to us acting in abnormal or rash behaviors. Further reasons for removing emotions exist too that can be quite costly. History shows that humans simply cannot time the market. So if you get emotional and think a big market correction is on the horizon and sell all of your equities, you can miss a huge bull-market opportunity. This happened to many investors from 2009-2011. Fear, a common emotion, left many investors on the sidelines as the calm investor made all of their 2008 losses back, and then some.
The opposite is also problematic. Irrational exuberance, another common emotion, can lead you to being undisciplined in your portfolio’s allocation. You know you’ve always been a 70/30 investor due to your risk profile however you can just “sense” that the market is going to continue its rocket-like ascension. Again, since we know we can’t time the market, this behavior can also have devastating effects. Many investors did this in their portfolios prior to 2008, or they did this in the housing bubble that helped create the 2008 collapse, and they intentionally took on excessive risk by getting overly invested in the stock markets. It’s happened many times in the last 90 years, and it will happen again. Emotions can lead to bad decisions on both sides of the coin and that’s why it’s important to remain driven by your own personal shot clock rather than what you “feel” is going to happen in the global markets.
The key point: Your timeframe, is the main thing. If you have 20-30 more years of “shot clock” remaining, it’s not a time to worry about daily, weekly or even monthly ups and downs of your account. If you have 5 years or less until you will need access to your funds, the opposite is true and of course you should have less exposure to the stock market. All of your decisions should be based on your own personal timeline rather than a prediction of what is to come. Predicting can of course lead to emotions, and emotions can be perilous to your portfolios performance.
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