Investing Discipline in Turbulent Times
By Karen Norman, CFP®
In 2007 we saw at least three occasions when there was a significant market downturn followed by a period when the market went back up. Now as we enter into 2008 we are again seeing a market sell-off.
It is never easy being an investor. It takes great discipline to ignore these market gyrations and stick to a good investment plan. No one can tell when the market will go up or when the market will go down and we should never attempt to be a market timer. Nor should we panic and sell out when things underperform our short term expectations.
Investors whose ‘strategy’ is to sell off and sit out these market downturns will underperform the market by a significant margin. Focusing on the short term and not the long term is a gambling strategy not an investment strategy.
So what makes us want to behave badly during these times? Well certainly no one wants to lose money. But we all know that taking no risk means losing money to inflation. Still we are driven by emotions and emotions make bad money decisions. As we always discuss with our clients – keeping a portfolio balanced to their personal investment objectives is counter-intuitive to our human thinking. It means selling things that are making money and buying things that are not – or selling the winners and buying some losers.
Why do you sell the winners? Because they have done well and now represent too large a portion of your portfolio and you buy the investments that are currently underperforming – thus taking advantage of low pricing.
Investors who do this re-balancing on a regular basis will end up doing just fine over the long run – and that’s what it’s all about – the long run.
Base your investment decisions on a good overall strategy and you will be rewarded over the long haul.
Copyright 2008 Karen Norman
