Warren Buffet had the following advice for investors: "Investors should remember that excitement and expenses are their enemies. And, if they insist on timing their particpation in stocks (equities), they should be fearful when others are greedy and greedy when others are fearful."
What Mr. Buffet is saying is that when things are the hardest to stick to, that's the time when we have to remain committed to our long-term goals. He believes, as I do, that the seeds of successful long-term investing are sewn when the very behaviors you find so hard to commit to must be the ones you exhibit.
What we know is what research paper after research paper has demonstrated; that as a group, average investors tend to buy high and sell low. Just the opposite of the behavior you'd be exhibiting as a successful long-term investor. Let's refer to this as "Anti-Buffet" behavior.
Anti-Buffet behavior is actually based on a combination of fear and overconfidence. It's a belief that you can beat the market in some way; that you have a strategy that will allow for you to do better than most others given any particular market. I wrote about the problems with being the eternal optimist in a previous blog.
It's this fear and overconfidence that promotes short-term thinking. And this short-term thinking clouds our judgement and results in the Anti-Buffet behaviors. In a world of short-term thinking and reacting, we think that we know the reason that the markets move as they do, we connect the "news" and soundbites to the markets movements. We believe that we know what drives the S&P 500 up and then down again but in truth we don't know that at all. Markets move, day-in and day-out, up, down and sideways and often times, those movements are tied to the most illogical and irrational of reasons.
The level of the markets on any given day isn't the real issue, even though you may think that it is. We struggle to find answers, make corrections, adjust our holdings, buy and sell, all in the interest of stemming some one-day or one-week or one-month tide in the direction of an index. When we lose sight of what our long-term goals were, we've lost our context for investing. When we've lost our context, we feel helpless and scared.
Investment goals, at least the good ones, aren't based on an index or a return number. In real life, people don't have goals such as beating the S&P 500 or earning 11% a year no matter what the risk.
I do however, know and have the pleasure of working with a lot of people that have goals such as "paying for my kids college" or "setting money aside for a European cruise on our 50th wedding anniversary" or "being able to enjoy a comfortable retirement."
Take a step back. Take a deep breath.......ready?
Ask yourself what your goals were and then consider the time frame that you have to get there. Is it ten years? Is it twenty?
And I'll bet that when you get to that magical "end" date, you're not spending all your money on that day, are you? If you're like most people, you'll turn on the perverbial spigot and a trickle of money will come out, hopefully over a long, long period of time. Either way, I'll bet the period of time over which your money needs to be dispensed will last longer than tomorrow's news cycle.
So, make adjustments to your financial plan if needed, then work to rebalance your portfolio based on sound strategic thinking. Don't worry about how the markets do because your success lies in your progress relative to funding at your goal date, not relative to the Dow or today's price of gold.
Be a better steward of your financial resources by thinking like the most successful long-term investor, that leads to both profits and better decision making.