We have all watched that scene in movies, where the stock market has crashed, and brokers trample each other shouting SELL! SELL! SELL! Although this makes for good television, in real life panicking when you see a drop in your investment can be the worst thing you can do.
Educated investors who stay on top of their investments understand that the market can be volatile, famous investor Warren Buffet says, “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for 10 minutes.”
If your investment drops and you panic; deciding to sell the stocks, you are locking in your loss – actually losing money. An unemotional investor, however, will have/do the necessary research and may leave the investment unchanged knowing that markets will recover.
When do you make an investment change/shift?
Assuming you did your research when making your investment decision; the rule of thumb is that you only change your investment when it is no longer appropriate for your objective, risk profile or time horizon. It is important to evaluate factors and consider market fundamentals and sentiment, which can be seen as the drivers of the investment fluctuations.
Market sentiment is the overall attitude of investors towards the market. It can be seen as crowd psychology, often changing without logic.
Market fundamentals are factual qualitative and quantitative information that investors use to analyse the value of a market, company or investment. When the price of oil goes up, fundamentals dictate that the price of petrol should do the same.
Understanding these drivers can be a unique balance, sentiment drives markets over the short term, while fundamentals do so over the long term.
Constant research is required
Emotional investors either panic and sell because of short term noise or, while misunderstanding fundamentals do nothing until it’s too late. Being disciplined or unemotional doesn’t mean picking an investment, closing your eyes and hoping for the best. You have to constantly review and monitor your investment and make changes if it’s prudent.
We need to get all the facts before we make an investment decision. However, facts change, and you need to change with new information. Don’t hold onto the past and yesterday’s facts.
Warren Buffett, who truly understands the value of research says, be fearful when others are greedy and greedy when others are fearful because sentiment is often wrong and emotional investors behave like a herd following the leader and panicking.
Invest for the long-term to avoid being emotional
Selling investments at a loss, because of short-term volatility, trying to time the market or not investing while waiting for the markets to go back to 2008 levels is short sighted. Sentiment, although often wrong over the short term, does not change fundamentals over the long term.
Life is about embracing change and adapting to reality.
When you invest for the long term, you can afford to be unemotional. Investors who seek short term results will get caught up with the emotional wreck of constant noise and volatility. Long term investors can sleep peacefully at night, as they can afford to ignore short-term volatility and emotion. Embrace volatility as it is our reality, but when leveraged within a sound investment philosophy can provide great long term results.
Research will guide you in understanding whether market changes are based on fact and reality, or if it is having a little temper tantrum. You will achieve your long term goals if you do your homework and make informed investment decisions. The market is people, and people are emotional. Do not be swayed by emotions, but ignore them at your detriment.