When the Media is eliciting fear and volatility in the markets seems greater than usual, the best thing for investors to do is to take a step back and revisit a few questions. Revisiting these questions can be a powerful cure to making knee-jerk reactions or irrational decisions.
- “Why am I investing?” Many people confuse investing with speculating. Did you invest in that company or are you speculating on what the price of its stock (or index of companies) will do? The difference between the two is huge. If you are moved to make investment decisions on current news, forecast and outcomes then you’re speculating and not investing.
- “What is different now?” Other than the listed price of a stock and the news story of the day, what has actually changed? Did companies suddenly become less profitable? Are people no longer needing cell phones, toilet paper, food or medicine?
The value of a said company hasn’t changed. What changed was how other people may value the company, their view of risk and what the media is saying. We usually think of something becoming riskier when it goes down in value but when a stock’s price goes down, that stock becomes more attractive in value than it did the day before.
The news, views, and valuations often change daily or even minute by minute. Decisions about financial matters should be made based on a disciplined plan and not on things that can change on a dime.
- “How does diversification help?” You’ve diversified your portfolio. Why? If stocks always went up and never went down, we wouldn’t diversify.
We do this because we know that at some point “pullbacks”, “corrections”, “bear markets” and “recessions” happen. We don’t know when, how or for how long but we do know that it will happen. We prepare for these events in your overall plan.
It’s easy to invest when markets are going up with ease but it can be more difficult when stock prices become volatile. Emotions can cause us to make poor irrational investment decisions that can negatively impact our long-term plan. I get it and I completely understand but there are ways to help you make good choices and keep from shooting yourself in the foot. That’s why I’m here.
If you know somebody that you think would appreciate this Blog, please don’t hesitate to forward it on.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities offered through LPL Financial, Member FINRA/SIPC
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.