Finding our way through the markets can be tough as we move through the typically volatile months of July through September.
But there’s always a path to profits, it’s like driving…
I’m sure that I’m one of the 70% of drivers who thinks he is a “better-than-average driver.” The humor in the statistic is that it’s impossible for 70% of anything to be above average (for you math majors out there, I do understand the difference between mean and median… just go with me on this one). Clearly, many of the people who think this are deluded about their own driving skills.
My own blind spot (pun intended) doesn’t have to do with cornering or negotiating freeways, instead it’s all about finding the fastest route to a destination. When I’m driving to a familiar location and hit traffic, sometimes I’ll cut down a side street or try some other way in an effort to avoid waiting.
At first I’m pretty smug about it, thinking I’ve outsmarted all of those other drivers who are simply lemmings, waiting in a sea of cars…
Then, the universe reminds me of my place by tossing up obstacles like traffic lights and long waits at stop signs. Almost every time, I realize that my initial path was still the fastest way to reach my destination, even if there happened to be a snag or setback of some sort.
This is a great reminder of how emotions and impulses can cloud otherwise clear judgment, and it is applicable outside the realm of travel.
A lot of investors want to move, or have already moved, to the sidelines… and for good reason.
Company earnings reports in July were not full of sunshine and roses, as many firms lowered their forecasts for earnings in future quarters. The Fed recently made noises about higher interest rates. Vladimir Putin continues to play a dangerous game with Ukraine.
Meanwhile, an extreme Sunni group out of Syria has overrun the borders of Iraq and claimed a lot of real estate. Then there is the Ebola virus. Some combination of this information drove the Dow down more than 300 points at the end of July, which was followed by a rocky start to August.
With all this in mind, it’s easy to see why people are questioning the equity markets, except for one thing. The markets have since recovered. In fact, we are once again reaching all-time highs.
Everyone who got off of the investing road when they saw the traffic jam of information regarding markets and world events, unless they were able to time it just right, are now running behind. It probably felt good to be out of the markets for a few days, particularly in the first week of August, but now those investors might be questioning the wisdom of their decisions.
When investing, like in driving, it is best to follow the system that has served you well in the past. This doesn’t mean blind allegiance. If new information is added — like a road closing or a central bank decision — then clearly people should alter their course. But short of that, giving in to impulses and emotions typically leads to a bad decision, which is often followed by regret.
Don’t let the noise around you drive you out of the markets. Let your investment philosophy and systematic approach do its job, providing direction for when to be involved and when to lighten up your positions, no matter what your emotions are saying.
This doesn’t mean your analytical approach will always be right, since nothing works 100% of the time, but it can definitely keep you from making costly mistakes based on how you feel at the moment.
Now, if you don’t actually have a systemic approach, and are instead basing investment decisions on how you feel after a lunch of spicy Mexican food or a fight with your spouse, then none of this applies.
Just like in driving, you might be circling your destination but are determined not to consult a map or ask for directions, no matter how long it takes to get where you want to be.
And probably, like me, you consider yourself an “above-average driver.”
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