“People have certain habits, some proclivities that are self-destructive in investing.” —Warren Buffet, CEO Berkshire Hathaway1
Late last week, volatility seemed to say, “Hi, remember me?” Global equities had surged to record highs earlier in the week amid strong earnings and economic growth. But the Senate announcement that its tax plan would delay a corporate tax cut to 2019 knocked them back down. All three major US indexes had weekly winning streaks snapped.2
With year-end approaching, we find that many of our customers are taking stock of their portfolios. Whether you’re an active trader or a buy-and-hold investor saving for retirement, hard work and research can produce alpha. But it takes awareness and discipline to stick to and execute an investment plan. Complicating matters is the fact that even extended bull runs can spook investors every now and again. Also, we’re human, and often tempted to act on impulse.
According to Buffett, one of the biggest investment battles we wage is the one against ourselves. So amid some recent uncertainties, and with year-end upon us, this week we offer three quick reminders about how investors can defend against those certain “proclivities".
Knowledge is power
Access to market information has never been easier. Research firm Dscout found that people touch their phones an average of 2,617 times per day.3 That could mean more than a few opportunities to check the latest market moves or headlines. There’s power in having gateways to near-instantaneous information about known assets or those with shorter track records, such as digital currencies. But that doesn’t necessarily mean investors should act on it and discard a more methodical, well-rounded, researched approach.
- Reminder #1: Know what you don’t know. Understand your own alpha-producing abilities and recognize that what you don’t know doesn’t mean sacrificing market returns. Rather, use that awareness to help define an investment strategy that suits your specific needs.
Noise is often just noise
Market buzz can be intoxicating. A hot stock or a much-talked-about IPO can have investors daydreaming about what could be, and ramp up the FOMO to the point of distraction. For example, earlier this year, tech company Snap (NYSE: SNAP) had the investment community excitedly anticipating its IPO. Thus far, though, the numbers show SNAP still has kinks to work out over the long term as it navigates life in public, potentially giving some investors pause.4
- Reminder #2: Define what's important. Knowing what matters to you, and what doesn’t, can shed light on the types of investments that would raise your risk tolerance to an uncomfortable level. It can be tempting to try to beat the market, to keep up with the Joneses, or find the next big thing, but doing so at the expense of your goals can be costly.
The market's going to move
Recent history shows the current bull market has been remarkably resilient, but it hasn’t fit neatly into a box. Volatility is part of the investing deal, even when the market’s on an upswing. Pullbacks and corrections are inevitable. But they also bring with them potential growth opportunities.
- Reminder #3: A good plan is hard to beat. The market’s going to do its thing. So can you. A sound investment blueprint can help you weather such moves. Asset allocation through a mix of stocks, bonds, and cash that complements your goals, time frame, and risk tolerance can allow you to set your own course.
One final thought
This one from Mike Loewengart, Vice President of Investment Strategy: “If you set reasonable investment expectations, you can decrease your odds of being disappointed. As always, play the long game. More importantly, play your game. Understanding your own limitations can help you avoid investments that could knock you off course.”
1. Serwer, Andy. “Warren Buffett: Here’s the ‘big mistake’ investors make,” Yahoo Finance, 3 May 2017. https://finance.yahoo.com/news/warren-buffett-heres-big-mistake-investors-make-163820066.html
2. Ponczek, Sarah. “U.S. Stocks Post Decline for Week Amid Tax Debate: Market Wrap,” Bloomberg, 9 Nov. 2017. https://www.bloomberg.com/news/articles/2017-11-09/asia-stocks-brace-for-volatility-as-dollar-falls-markets-wrap
3. Naftulin, Julia. “Here’s how many times we touch our phones every day,” Business Insider, 13 Jul. 2016. http://www.businessinsider.com/dscout-research-people-touch-cell-phones-2617-times-a-day-2016-7
4. Driebusch, Corrie; Farrell, Maureen; and Wells, Georgia. “Snap’s Rise and Fall: How a Big, Splashy IPO Prompted the Doubters to Keep Mum,” The Wall Street Journal, 9 Nov. 2017. https://www.wsj.com/articles/snaps-rise-and-fall-how-a-big-splashy-ipo-prompted-the-doubters-to-keep-mum-1510249164