When the markets are relatively stable with no crisis on the horizon, whatever is the financial media to do? It comes up with headlines like: “It’s Getting Scarily Quiet in the Stock Market”1 and “The Stock Market Is Quiet. Too Quiet.”2 Even when the stock market is humming along nicely (as it was in August), there’s still pressure to act — often in a way that’s contrary to your best interests. After all, the fear of losing what we already have is real. But successful investing requires discipline in good times, just as in bad times. Over-optimism in a rising market can be as dangerous as unfounded over-pessimism in a market decline. It’s all about keeping your emotions in check.
Of course, that can be hard to hear when things are going well, your portfolio is up and the likelihood that you’ll meet your most important financial goals is looking ever better. In August, all three major U.S. stock market indexes — the Dow Jones Industrial Average, the S&P 500 and the Nasdaq composite index — all closed at new highs on the same day.3 Early last month, the Nasdaq posted an all-time closing high. At that time, the market hadn’t suffered a daily loss of at least 1 percent in 10 weeks.4
But research into behavioral finance has found that investors tend to be over-optimistic about their life prospects and that this optimism can directly affect their financial decisions.5 Over-optimism combined with market highs can breed overconfidence (investors overestimate their rank in a population based on some positive dimension or the accuracy of their beliefs). And overconfidence can lead to a range of behavioral mistakes that cause over-optimistic investors to underperform the very funds in which they invest.
Our long-term, comprehensive investment strategy is designed to help take full advantage of a rising market in a deliberate, measured and evidence-based manner that incorporates what decades of peer-reviewed academic research has shown to work. One of the few things that may be worse than realizing losses is the knowledge that you failed to take full advantage of the returns provided by the market due to misplaced hope (or hype) in the prospects of some particular sector, asset class or stock.
Perhaps a companion fear to losing what we already have is the fear that we’ll get left behind. But if you are sticking to your financial plan and to the individually tailored portfolio designed to meet your life and financial goals, you’re right where you need to be. We develop a plan that is geared for the long term and takes into account rises and falls, both large and small. Recognize the attempts by the media and others to play on your emotions, and let me as your advisor help you stay on the right track.
3 Time.com, “This Stock Indicator Hasn’t Been This High Since the Start of the Last Bear Market”
4 Investors.com, “Nasdaq Closes at New All-Time High”
5 ETF.com, “Swedroe: Overconfident Enemy in Mirror”