What, me worry?
Deciding to self-manage your long-term portfolio can bring worry. After all, it's (hopefully!) a significant amount of money to manage - or at least will eventually be. There are countless sources in the financial world reciting the following mantra:
The investing world is no place for amateurs; professional help is a must. Most individual investors do not understand the array of complex investment vehicles available and, even if they do, they are prone to making poor investment decisions based on emotions, especially in down markets.
It's true that the plethora of investment vehicles available are beyond most individual investor's comprehension; it also true that far too many investors let emotions rule their investment decisions. However, the following retort can prove more useful:
Individual investors should avoid investment products they don't understand - with or without professional advice. And, by adopting the proper mindset, those investors can harness their emotions and remain faithful to their long-term strategy.
Avoiding what you don't understand should be easy-to-execute advice; achieving the 'proper mindset' to fight emotional decisions is tougher. Three tenets are key when getting your mind right for long-term investment management:
- Emotions are the worst investment advisors. When holding a volatile investment (like an equity mutual fund or ETF), your emotions are perfectly wired to force the worst decisions. During bull markets, many investors succumb to greed and buy, even though the bull market has made the stock or fund more expensive to buy. The opposite occurs during a market correction; falling stocks can engender fear and, feeling alarm and their shrinking account balance, investors may panic and sell. This 'selling low' locks in losses precisely when the lower price of the stock should present a buying opportunity. The Wall Street Journal discusses more of this emotional behavior here: https://www.wsj.com/articles/how-your-emotions-get-in-the-way-of-smart-investing-1434046156
- Short term market swings matter not. Long-term investor have long time horizons. As discussed in the What is Long-Term anyway? blog post, "During periods of ten years or more, the volatility that we see in equity investing begins to settle out...". This tendency to 'revert to the mean' directs the long-term investor to keep cool during both up and down swings and simply ignore the short-term volatility.
- Consider down fluctuations as a sale. When the market sags, it does so because stock prices decline. As a stock or mutual fund owner, this may cause anxiety. But, as a long-term investor, you are also a stock or mutual fund buyer, and buyers love sales. Finding a $70 pair of jeans discounted to $35 is a buying opportunity (duh!); discovering a stock previously valued at $70 now available at $35 should, all else being equal, be a similarly attractive opportunity. This concept can help reinforce why panicked selling after a market drop is unwise.
By controlling investing emotions, ignoring market swings, and conceptualizing down markets as good news for buyers, you have insurance against one of the most formidable adversaries in the quest for wealth-building: you. Jack Bogle (founder of the Vanguard Group) said it best:
Time is your friend; impulse is your enemy