Investors are feeling anxious.
Today, tens of millions of investors are glued to the Wall Street Journal, Bloomberg.com and their online brokers’ accounts. The markets are not looking good.
I’m not going to give you all the gory details here. There’re plenty of other places to find out how much oil, Aim, the Shanghai Composite and the S&P are down this week.
Instead, I’d like to offer you a simple piece of advice: DO NOT call your broker today.
Out of your hands
Investing is not fun on weeks like these. You can’t help but check and re-check your portfolio. And you feel like you’re not in control of things.
To make matters worse, the financial press is screaming blue murder. It’s rolling out the darkest dates in stock market history…
The financial press love nothing better than a good market correction. It’s good for ratings! Yesterday, Bloomberg.com splashed a three-inch-thick, blood-red banner across their home page for live coverage of the market “meltdown”.
It’s all very stressful.
Amid all the panic, excitement and action, it feels as though you should be doing something. Sitting around doing nothing doesn’t feel like a smart strategy. But it’s the smartest thing you can do.
Trust the trend
As I’ve written a few times before, stocks go up more than any other type of asset in the long run. The price investors pay for stocks’ excellent long-run performance is that stocks are more risky. What that means is that stocks are more prone to weeks like the one we’re having now, when a big chunk of their value suddenly disappears.
Here’s what I wrote last week:
Risk and returns are joined at the hip. I’ve sketched out the relationship between risk and return on the graph below. Risk is represented by the red zig-zags, and return is shown by the blue trend line.
Basically, the bigger the zig-zags (the bigger the risk), then the steeper the slope of the blue line will tend to be (the bigger the return).
The key to investing in stocks successfully is to ride out the lows (the red zig zags), and trust in the long term trend (the blue line).
But most investors don’t invest this way. When news is very bad (like it has been this week) they get panicked into selling. And when the news is very good they get swept along in the euphoria. So they buy at the top and sell at the bottom.
Studies have looked into just how much this tendency costs investors, and the numbers are frightening. One study by Geoffrey Friesen and Travis Sapp estimated that over 30 years of investing, attempting to time the market knocks more than a third off people’s portfolios.
So resist the urge to act. Trust your overall strategy.
On twitter, the behavioural economist Richard Thaler summed it up neatly:
“Inhale, exhale. Repeat. Then watch ESPN.”
Until next time,