On a rational level, most of us would acknowledge the fact that the stock market has always exhibited volatility, both up as well as down. We gladly accept that volatility when stock prices are going up, but when stocks decline, it can sometimes feel like the world is coming apart, especially when the market is seemingly in a freefall. Suddenly, it’s not intellectual anymore, it’s emotional.
We naturally want to have reasons for times like these and the financial media is more than happy to give you their take on it. The truth is that market sell-offs are often less about any particular underlying causes and much more about gut-level fear, herd behavior and panic selling: We may feel like things are spiraling out of our control and we want to do something about it. But this is exactly the kind of thing that can derail a sound long term financial plan.
There are always things happening around the world that can cause us to worry in the face of uncertainty. We tend to forget that the stock market has a long history of such periods of overreaction. According to one researcher’s calculations, the U.S. stock market has been in a “correction” of 10% or more about 20% of the time since World War Two.
It is important to remember that we are long term investors, not traders or speculators. Your portfolio is designed for the long haul, invested in a broadly diversified list of global companies on the premise that long term wealth is ultimately created by underlying economic fundamentals, not by changing day-to-day market sentiment. It would be hard to imagine, for example, a successful investor like Warren Buffett panic selling. If anything, he would probably view a sell-off like this as a potential opportunity to buy quality companies at lower prices.
As your financial advisor, our advice is to stay the course and stick to the time-honored principles embedded in our investment philosophy and process. This storm will pass eventually. I have always admired the posters that the British Government printed up during the darkest days of WWII, when it was commonly believed that the German invasion of that island was imminent: Keep Calm and Carry On.
P.S. I recently finished reading an excellent book on investing that encompasses many of the key points in our investment philosophy and process. I highly recommend A Wealth of Common Sense by Ben Carlson (Wiley 2015). The book is well written and will reinforce and add additional perspective to many of the points in this message.
[caption id="attachment_1835" align="alignleft" width="150"] John Finely[/caption]
Coyle Financial Counsel’s John Finely is a Chartered Financial Analyst. John oversees our investment advisory process and conducts investment reviews for clients. He also shares periodic market commentary.
John has more than 13 years of experience managing institutional fixed-income portfolios, with extensive expertise in investment grade asset classes, including government and corporate bonds and mortgage-backed and asset-backed securities. He most recently served as senior portfolio manager at BNP Paribas Investment Partners.
John earned his MBA in finance from Northwestern University’s Kellogg Graduate School of Management and has a Bachelor of Science degree from the University of Illinois School of Business at Urbana-Champaign. He serves as an adjunct professor of finance at Wheaton College and teaches a course entitled “Investment Analysis and Capital Markets,” an upper-level business/economics course.
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Posted on Mon, August 24, 2015
by John Finley