“Fear is an idea-crippling, experience-crushing, success-stalling inhibitor inflicted only by yourself.” - Stephanie Melish
Today’s world can be characterized by events, changes, which are often unpredictable and sudden, whether a terrorist event or the unexpected outcome to a known event like the BREXIT or US Presidential votes. Those who have a flexible mind, who are able to change and adapt to ever evolving circumstances, thrive (be it an individual or an entire species). An open mind, a supple mind, a flexible mind can help us to reconcile these unknown, unpredictable and to many ‘scary’ events around us. If our mind is instead fixed, or closed, then we are often gripped by fear and internal paralysis.
The morning after the election, my son, having gone to bed before final results were known, first asked, “…dad, who won?” “Trump,” I told him. “You are kidding!” he shrieked. “I thought everybody said Clinton would win. Are we going to be OK? Is that going to impact us?” he asked with obvious fear and concern in his voice. “Are your waffles warm?” I asked as I handed him breakfast. “Yes.” “Is the sun shining?” “Yup!” he replied, his face starting to soften. “Is Trump going to keep you from going to school today, or playing your soccer game this weekend?” I inquired. “Of course not!” he exclaimed with joy. “Then we are going to be OK!” I declared.
Two important lessons and how they apply to our financial lives:
1) Stop trying to predict outcomes to events, let alone their impact on near-term stock market moves. If 2016 was not a prime example of the unpredictability of ‘known’ events, not to mention market reactions, then I don’t know what will convince you of such. Cases in point: OPEC decided not to cut production and oil prices… took off (experts predicted they would plunge which was the ‘logical’ conclusion). To the surprise of many, BREXIT received a yes vote and after a very brief market decline (which many investors sold into at prices 30% or more lower than where the same stocks are today), within a few trading days stocks were higher than pre-BREXIT. Then the surprise to top all surprises, Trump won and then… actually the surprise to top even that unexpected outcome, stock prices rose. Bigly. If on the Friday before the election, US stocks having suffered their longest consecutive day losing streak in decades, someone told you that Trump was going to win the election, DOW futures would plummet nearly 1,000 points, and that within days the market would recover all the losses of the previous 9 trading sessions on the way to a new all-time high, you would have shouted, “lock that person up!” But that is exactly what happened. So get out of the prediction business as it will only lower your long-term returns, and get into the think carefully about your long-term goals and construct a portfolio consistent with those goals business.
2) Don’t let fear drive your day-to-day actions, or at least your financial decisions. Ultimately fear is simply something between our ears. It is not a thing you can buy or sell; no one can force it upon you. It is solely of your own creation. Yet it drives so many people’s actions – or inactions – in highly irrational ways. To be sure, fear is a natural human emotion and actually important for our basic survival. But our brains have largely not kept pace with human evolution; they are wired to exhibit fear as a means of survival, to warn us against impending dangers like the lion that is about to eat us for dinner. Understanding this and putting mechanisms in place to protect your financial well-being is of paramount importance less you take actions based on fear which will invariably hurt your long-term investment returns. One of the greatest values a rational, highly disciplined professional Investment Advisor can bring to a relationship is objective advice sans emotions. Not taking action at certain times can keep investors from locking in losses that would have otherwise turned into gains as witnessed on multiple occasions in 2016 alone.
Money is merely a means to an end, or many ends. Education, housing, food, leisure, etc. The less we try to predict markets, the less we involve emotions in the investment process, the greater likelihood for a successful outcome. Save the emotions for things like relationships, love of art, etc. and when it comes to your heard earned money, don your Vulcan ears, or if you don’t own a pair, work with someone who does.