Fighting The Urge To Act
If you turned on the news to see the Dow dropping, you likely felt a sudden spike in blood pressure and an urge to act. The stock market wobbled like an unwilling punching bag to a barrage of negativity, including a Federal Reserve interest rate hike, new tariffs on China, a Facebook data leak, and the resignation of President Trump’s lead attorney. On days like this, we get such gut-wrenching emotions for the same reason we feel anxious as passengers on a plane but not as drivers of a car. We cast aside logic (air travel is far safer than car travel) because we biologically require control. And when things take a turn for the worse, we feel an inherent impulse to steer away from danger no matter the collateral damage.
As hyperbolic headlines reinforce these all-to-human emotional responses for the sake of clicks and advertising dollars, investors panic and take imprudent action, collectively furthering the damage to portfolios and markets. Rather than respond, investors with long-term, diversified portfolios should do nothing at all. While it’s hard to stick to such stoicism in the face of fear, try to remember how panic forced investors to sell during the Great Recession. If you had chosen instead to weather the storm, your stock portfolio has likely grown for the last decade as the Dow rose roughly 17,000 points.
On top of our urge to act, we’re always cautious of what’s to come, needing to know what lurks around the corner so we can make the first move. Unfortunately, trying to foretell market movements is a lot like putting 1,000 random ingredients in a blender and guessing whether an entire group of people will like how the resulting smoothie tastes. Despite today’s sudden wave of negative news, many experts could argue that fundamental factors like wage growth and corporate earnings should continue to bolster the market. Meanwhile, two expert economists looking at the same data could tell completely contradictory stories about the future of the economy.
All of this points to the power of diversification and maintaining a long-term investor mindset. While we should never feel guilty for the human emotions we’re innately programmed to feel, we need to recognize that our emotional actions can prove far more detrimental to our long-term financial success than news headlines or single-day market moves. While even diversified portfolios will face volatility, long-term investing can help suppress fear and protect us from our poorly timed investment decisions that can destroy wealth.