Investors are people, and people are often impatient. No one likes to wait longer than they have to for something, especially when so much is just a click or two away.
This impatience also manifests itself in the financial markets. When stocks slip, for example, some investors grow uneasy. Their impulse is to sell, get out, and get back in later. If they give in to that impulse, they may pay a price.
It’s important to remember that past performance does not guarantee future results. The return and principal value of stock prices will fluctuate over time as market conditions change. And shares, when sold, may be worth more or less than their original cost.
Investors can worry too much, which can cause emotion to come into play. Too many investors make quick, emotional moves when the market dips. Logic may go out the window when this happens, in addition to perspective.
In the long run, an investor who glances at a portfolio once per quarter may end up making more progress toward his or her goals than one who anxiously pores over financial websites each day.
Some long-term investors keep focus. Warren Buffett does. He has famously said that an investor should, “buy into a company because you want to own it, not because you want the stock to go up.” Buffett often tries to invest in companies whose shares may perform well in both up and down markets. He also has famously stated, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” In contrast with Buffett’s patient long-term approach, investors who care too much about day-to-day market behavior may practice market timing, which is as much hope as strategy.
To make market timing work, an investor must be right twice. The goal is to sell high, take profits, and buy back in just as the market begins to rally off a bottom. But there is volatility in financial markets and the sale at any point could result in a gain or loss.
Even Wall Street professionals have a hard time predicting market tops and bottoms. Retail investors are notorious for buying high and selling low.
Investors who alter their strategy in response to the headlines may end up changing it again after further headlines. While they may expect to be on top of things by doing this, their returns may suffer from their emotional and impatient responses.
When thinking about your investments, consider what Nobel Laureate economist Gene Fama once said: “Your money is like soap. The more you handle it, the less you’ll have.” Wisdom that may benefit your strategy, especially during periods of market volatility.
Lastly, do not allow the market to dictate your mood. Work with a professional who can shed light on whatever is taking place in the market to hopefully make you more aware and understanding.
Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA / SIPC. Other advisory services offered through Redwood Financial Network Corp, a Registered Investment Advisor and a separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including the loss of principal. No strategy assures success or protects against loss.