For investors, the first temptation when market turmoil erupts is to just do something; an urge that usually results in selling, an action that often concludes in regret and maybe losing your shirt indeed.
For others, the impulse is to do nothing and sit on your hands until the storm passes, because it always does. Still others see opportunity at every turn and jump in with both feet.
The best course, though, lies somewhere between. Indiscriminate selling is a fool’s game; willy-nilly buying assumes you know when the end is in sight; doing nothing risks getting caught in a vortex that could take years to escape.
Figuring out how to navigate such an environment requires both a cool head and a willingness to acknowledge where common sense adjustments are needed without going overboard. Investors were caught in a tough spot as stocks declined aggressively this week amid fears of a recession and a trade war with China. But those of you who read the “Insanity” email know it is more of the same and not necessarily a map to the end game. Take a look at the longer picture.
Take a “never fight the Fed” mentality, while central bank action is important, assuming that their actions will last forever is a huge mistake. Rather concentrate on the core principles to guide investing and to avoid the urge to chase rallies or panic in sell-offs.
The vast majority of your portfolio, you probably literally should take sort of a once a year approach towards it. Set it in motion and revisit it once a year. If you just can’t stand that, then give yourself a small portion of your portfolio that you can play with during the year. If you screw that up, it won’t screw up your overall portfolio. At least it gives you enough chance to stay sharp.
You hear talk about the rear view mirror and performance chase. So, turn the mirror to yourself and understand who you are as an investor, what are the things that are going to trip you up. True risk tolerance is, ‘How much can my portfolio decline before I make a really dumb decision and panic and do something that turns out to be a really wrong decision?’
Now if you are a solely a day trader rather than an investor, pretty much everything I said is of no importance to you, but it is good advice in any case.