We’ve been doing a lot of reading leading up to and since the election: as you’d expect there is no shortage of opinions of what is going to happen to financial markets and how investors should position themselves as a result.
The investing opinions vary as extremely as the political views. We’ve read crazy things and some very sensible things. Perhaps the best articulation of how to approach this was written by Ron Lieber in the New York Times on Wednesday when he asked, “Are your goals different now?”
“Once upon a time — like, say, last week — you had an investing plan that was based on goals that may come years or decades from now. Perhaps you’re hoping to buy your first home. Maybe you’re trying to save enough to send a couple of children to college. You hope to retire by age 67.
Has any of that changed? If it hasn’t yet, then it’s not clear why your investments should.” – Ron Lieber, New York Times
Big events happen and market volatility sometimes accompanies. That doesn’t mean you should try to guess the market’s reaction. As Lieber hints, changing your investment strategy to either protect you or try to take advantage of market volatility can be a sucker’s game. At best you’ll get lucky: at worst you’ll fall victim to many of the psychological pitfalls that leave most investors, both individual and institutional, chasing the market to the detriment of their investment performance. Speculating and investing are very different things. You are an investor and investing successfully is a long term game.
So what should you do?
1.) Ignore the noise
Forecasters and pundits are as loud as ever right now. As Rob Carrick wrote in the Globe and Mail on Thursday:
“Uncertain times are bullish for market strategists, gurus, pundits and such who want to build a brand by offering clarity about what happens in financial markets … Ignore it all. Do not remake a portfolio that was sensibly diversified using bonds and Canadian, U.S. and international stocks … Why tilt a portfolio on pure speculation?
2.) Stick with your plan
Your investment plan has been crafted specifically to address your willingness, need and ability to take risk. It is aligned with your broader financial plan and designed to deliver what you want from it. It’s unlikely the election results change any of these things.
3. ) Ride through short-term volatility
You should never feel in a hurry to make portfolio changes: sit back and relax. Again, investing successfully is a long-term game. In the short-term financial markets can be moody and fickle, as Rob Carrick said rather aptly in the same article:
“The stock market is a drama king / queen.”
4.) Re-balance if necessary
If broad market swings mean your target asset allocation is thrown way out of whack, then make the necessary adjustments to bring it back into balance. You may find that in the face of panicked buying and selling, your disciplined re-balancing plan naturally gives you opportunities to buy low and sell high.
5.) Observe and reflect
This is volatility: how did you react? Are you OK? Do you feel like selling all your stocks and buying gold? Feel like doubling down on the market every 2% drop? Every time we face volatility is an opportunity not only to lean on your disciplined investment plan but to test your attitude towards risk.
The benefit of having a pre-determined plan is that it shields you from the emotions that are inevitable. Everyone has their own political views but you shouldn’t let those views and associated emotions overflow into your sensible investment strategy. Ignore the noise. Leave the excitement to the day traders. Some will be wildly successful. Others will fail miserably. That’s Vegas. That’s speculating, not investing. That’s not you. Stick with your plan.
Graham Bodel is the founder and director of a new fee-only financial planning and portfolio management firm based in Vancouver, BC., Chalten Fee-Only Advisors Ltd. This blog is republished with permission: the original ran yesterday (November 10th) here.