Market Fluctuations - What Should I Do?

A few days ago, a person asked me to review their investment portfolio. They explained that they were fairly conservative, and wanted a "second opinion" of their investments. They had all of their money at a "bank" and were not happy that the person advising them had told them to to stay the course, while they were freaking out about the market dropping like a stone last fall. Neither had a pension plan at work, and this money was their entire retirement plan. They wondered what they should do.

Any decision made while freaking out is rarely the right one. Let's start with some data. When it comes to investing, human nature is not our friend, and will consistently lead us to do the wrong thing at the wrong time. In fact, one of my own investing mantras is "whatever you think you should do, then do the opposite".

History has shown us that we pour money into the stock market after the great years and panicked and sold during and after declines. This creates a clear pattern of buying high and selling low, something I'm pretty sure investors didn't consciously set out to do. Buying something on sale is the first thing we'd do if we were shopping for almost anything else, from electronics to a house. That logic is conspicuously absent when it comes to the stock market. For whatever reason, we'd rather return them at a lower price than we bought them for.

Past studies have consistently shown that our ability to consistently time the market poorly costs us roughly 1.5% annually in returns. Investors in both actively managed funds and index funds exhibit poor investment timing. If only retailers had it so good.

Think of your favorite retail store. Whether you favour a small boutique, a local shop, or one of the big box stores, we are usually more inclined to buy something we want when the retailer has a sale. Imagine that one day your favorite store had a "we've doubled our price sale," followed by a "50% off sale." We'd all shake our heads at the absurdity of getting in line to buy at the first sale, only to then rush back and return the items at 50% of our original price. It sounds silly, yet that's exactly what most of us do in our investing. And we do it with a lot more money than what we would spend at any store.

One of the most important roles of a good adviser is to provide some focus and discipline in your investing. I have often likened the role of an advisor to being a pilot. If you are flying from Toronto to Hawaii and the pilot is off by one degree, you end up missing Hawaii by hundreds of miles. The best advisor is consistently and constantly reminding you of your goals and objectives. When you begin to get off track, it's his/her role to get you back on track. In doing so, he/she is trying to protect you from your own human instincts, which will almost certainly fail you. My advice: While I know that I don't know what the market will do over the next six months, there are some things I do know.

I know that we will consistently buy high and sell low if we react to our emotions.

I know that money coming out of stock mutual funds is often a sign that the market will turn around.

I know that the market has rarely lost money over periods of ten years or longer.

I know that these are the times that try investors' souls and separate the speculators from the investors.

My advice to the person was to stay the course. It turns out their concerns over the "bank" was a lack of communication. We solved that problem. Find out what type of investments are right for you. Figure out how much of your money to put in each type of plan. Then stick to the plan like glue.

Stay Well and Pay It Forward.