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Mark Zaifman's thoughts on money, global economic trends and politics

Why Panic is Not an Investing Strategy

Mark Zaifman   |    Tue, May 15, 2018 @ 11:44 AM

panic button

With the political news, or should I call it the political storm-y brewing in DC, we might recall that it was only a few months ago that talk of a trade war with China and potential tariffs on steel and aluminum created dizzying volatility in the stock market.

As most long-term investors have (hopefully) learned over the years, panic is not an investing strategy. But the media often takes the opposite view, as they breathlessly rush to report “breaking news” and add “markets in turmoil” specials after particularly volatile days. This wall to wall coverage must work to gain viewers or they wouldn’t do it.

Instead of getting sucked into the panic-do-something-anything, media environment, it’s always a better idea to take a step back, turn off the news, keep your emotions in check and maintain your long-term investment outlook. And yes, that’s easier said than done, especially when you’re retired. Yet it this type of discipline that’s needed during days or weeks of high volatility.

Within one day recently, we saw a 700 point swing in the Dow Jones Industrial Average from a big loss to a solid gain. The media, especially financial media, has a tendency to want to find the 'one' force each day for every move or swing in stocks, as if the stock market were otherwise an inanimate object, waiting for specific news to swing it in one direction or another.

The stock market has always been more complicated than that. Most economic forecasts back in December indicated market volatility would escalate this year-consistent with late-cycle economic and market tendencies. So far, that forecast has been spot on.

Fight or Flight

“The fight-or-flight response (also called hyperarousal, or the acute stress response) is a physiological reaction that occurs in response to a perceived harmful event, attack, or threat to survival. It was first described by Walter Bradford Cannon”. Source: Wikipedia

It’s been relatively calm in the markets over the past week or so compared to a couple months ago. Yet we’re only one news event or one tweet away from another stock market ride on the roller coaster.

While the seas are relatively calm, so to speak, now’s a good time to explore your ‘interior finance’ and get a grip on your emotions before the next bout of volatility. Here are five questions to ask yourself:

  • Does your investment strategy align not only with your tolerance for risk, but your capacity for risk?
  • Were you able to hold tight during the latest bout of volatility or did you panic and sell all or a portion of your stock holdings?
  • If you’re retired and depending on investments to fund your lifestyle, do you have 1-2+ years of cash in short-term bonds or a money market account to ride out a major downturn in the stock market?
  • Are you able to tune out the noise during market pullbacks?
  • Are your investment return assumptions too aggressive or too conservative or just right?

Emotions, for better or worse, play a dominant role when it comes to investor behavior. Fear and greed are the two major emotions that trip up lots of investors. It’s why many people get emotionally hijacked when the markets go south, panic and sell.

One of my very wise mentors, when I first started my financial planning practice over 15 years ago, once said to me that my main role as a financial advisor will not be comprehensive financial planning or investment management, instead it will be preventing clients from making major mistakes with their money during times of high stress. He was so right.

Bottom line: Before we have the next bout of high volatility in the markets, check in with yourself and answer the 5 questions listed above. Remember, if you’re not working with a trusted financial advisor that works in a fiduciary capacity, risk management is your responsibility.

The clearer you are on the amount of risk you’re taking with your investments, and course correcting if needed, the sooner money will become your servant and not your master.


Panic photo credit by Darla