Investing is like a blossoming romance. When the markets are up, it correlates to a budding new relationship: exciting, exhilarating, and full of promise. When the markets are down, it resembles a bad breakup; you’re depressed, overwhelmed by fear for the future, pessimistic. Your investments can prompt the same range of emotions.
When the market experiences large swings, incessant media reports can induce panic, driving some to make major decisions on short-term information. You can find yourself becoming a trader instead of a long-term investor.
Believe me, when I listen to constant news stories about how bad things are, I also wonder if the sky is falling. Do I need to jump ship and completely go into cash or gold?
Then I recall history. Economic, political and global changes have always created investment opportunities. But to see the possibilities, one must look beyond the negativity. Before streaming news and the Internet, investors relied on financial information in The Wall Street Journal and The Financial Times. One had to take the time to read the stories and digest them. There wasn’t a flood of information calling for immediate reactions.
The pessimism that exists today may lead some to conclude that there’s no point in investing. One minute there’s a gain in my portfolio; the next it drops in value. It’s exasperating – enough to make you stop opening your investment statements. But stop for a moment. Take a breath and remember: All the news we’re hearing sounds much like what we heard this time last year.
You’ll recall that the markets responded turbulently last August, when Standard and Poor downgraded government-issued securities from AAA to AA. Again, panic set in and the news inflated the situation with endless discussion about the threat of a double-dip recession. I agree that the recovery is not moving as quickly as we all would like. But I recall the wisdom of Sir John Templeton, legendary investor and philanthropist: “The four most dangerous words in investing are: This time it’s different.” Hoping that bad things won’t happen again is not a sound investment strategy. Pay attention to mistakes and learn from them. Investors must participate actively in the process, just as in a fulfilling relationship. You cannot sit back and think it will all just miraculously work out.
You should adopt the same approach to your investments that you take in your personal relationships. When you get warning signs about their vitality, start evaluating whether it’s worth your commitment. Your portfolio may be comprised of common and preferred stocks, bonds, open and closed end mutual funds or exchange-traded funds. But, remember, your investments are mostly just that – investments in individual companies like Walmart, Johnson & Johnson, Exxon Mobil, Nordstrom, and Target. Whether you purchase shares or lend money for a fixed rate, you are investing in these companies. This may be the time for you and your financial planner to talk about shifting to other strategies, such as non-correlated investments (alternative investments) or risk-adjusted investments that provide the best returns.
Economist Benjamin Graham gave this advice: “The individual investor should act consistently as an investor and not as a speculator.” An investor looks for good investments that are reasonably priced, while a speculator bets on risky vehicles. An investor holds high-quality stocks for the long term and anticipates gradual price appreciation; speculators hope for rapid gains, so they can sell quickly and move on to their next gamble. Sometimes they win. Sometimes they lose.
For any relationship to succeed, the parties must be engaged, actively involved. Before I got married, I was told that communication would be key to our success as a couple. The same goes for a relationship with a financial planner; you must communicate — and that communication includes both talking and listening. Ensure that your desires, needs and concerns are heard ,and be prepared to compromise on expectations because of market performance, life events, and saving habits. Rely on the research and analysis that your financial planner provides; use this information to make a decision. If you come to the same conclusion about the investment and its alignment with your performance goals, stay the course. If not, sell it.
Once again: Don’t make long-term decisions on the basis of short-term information.