- Doug Oosterhart, CFP®
Here's What I'm Hearing
Every time an investment portfolio is built and selected, the investor thinks about risk. More specifically, the risk/reward tradeoff. What does that mean? Generally speaking, by taking on more risk, the investor hopes to earn more return. Investors often think about how they would "feel" should they experience a paper loss vs. how they would feel if they "missed out" on a paper gain (because you don't gain or lose money until you sell).
We are told to keep emotions out of it when investing yet we think about risk from an emotional perspective. It doesn't matter who you are or your level of experience in investing - people want to feel good, and they don't enter any investment in hopes that they lose.
In 2020, I've heard everything. These statements are from friends, family, acquaintances, Twitter followers, etc.
In January and February:
"We went 'safe' too early."
"2019 was a good year, how about we use some profits for fun money and try to earn a higher return?"
"My portfolio is *only* up XX% in 2019, can we do anything more aggressive?"
My response generally was: if it's in line with your goals and plan, yes. If not, no.
Late February through late April:
"What should we do? I used to be up XX%. Should we sell?"
"Is there anything we can do to mitigate losses?"
Some clients that came on in Q4 2018 have now seen two 20%+ corrections in the stock market since we have been working together. It's not a matter of "if" corrections happen but "when." The thing is: we cannot time them. We have to account for them when doing financial plans. We ask questions like, "how does my/your level of success change if the market goes down by X%?"
May and June:
(After the market is up 45%+ from the March lows and FOMO has entered the picture)
"All right, I think I'm ready to be more aggressive."
"I set up a Robinhood account, what's the best thing to invest in?"
"How do we know what's gonna pop? I saw people who doubled their accounts last month."
Here's the deal. We don't know what's going to "pop." We can have a thesis as to what will perform the best coming out of current economic situations, but we don't know for sure. As I write this (6/11/2020 about 7 am ET), S&P 500 futures are down about 2.5% for the day. It's still volatile. Jerome Powell just said yesterday that the stock market's run in the short-term is "not sustainable" long-term. Is the fed propping up the market? Yes. Does it mean doom and gloom? We don't know. In plain English, here is what drives the market - order flow. If there are more (and bigger) sellers than buyers, the market will go down. If there are more (and bigger) buyers than sellers, the market will go up.
No matter how good you think you are, emotions and human nature overrule everything. We can't time the bottom and we can't time the top.
Mathematical plans work best. Emotions can get the best of advisors too. I don't like to see paper losses in client accounts. There were days that I had a pit in my stomach too. But we stick to the plan and stick to the math. We rebalance portfolios when stocks are down to buy more and we rebalance when stocks are up to lock in some gains. If a client is comfortable using a small percentage of their portfolio for "fun" money AND they are well positioned to meet their goals, fine. That being said, if you have FOMO, the easiest way to blow up your account is by trying to double it in one month.