During the recent market turmoil financial pundits have dished out plenty of advice. Some claimed because we were overdue for a bear market investors should sell at the first opportunity. Others asserted that stocks were “on sale” so now is the time to buy. Splitting the difference, others said “don’t panic” and just stand pat. So who is right and, more importantly, what should investors do? The answer is surprisingly clear cut.
Those with a formalized investment strategy should do exactly what their strategy says to do. Whether buy, sell or hold, they should act according to the rules of their structured investing program. It is in times of turmoil when a disciplined approach can be of the most value. This is because those with a structured process will simply follow the investing behavior that their discipline mandates. Otherwise an investor faces the utter futility of trying to predict the short term direction of the market. Because strategies vary, some disciplines will say buy, others will say sell, the rest do nothing. Whichever, a disciplined investor is distinguishable by the relative indifference they exhibit towards market turmoil.
Of course any investment strategy worth its salt will presume the inevitable likelihood of future market downturns. They are a naturally recurring part of investment life. Going on instinct during times of turbulence is, more often than not, a recipe for disaster.
Any and all investment strategies should be personalized according to goals and tolerance for risk. The essential requirement, however, is that the strategy abide by a set of reasonably detailed, quantifiable, and repeatable standards that dictate investment decisions.
Note that even the best investment strategy will be sub-optimal at times. Indeed, hindsight will almost always reveal a better path than the one taken. On average, however, a structured, detailed and disciplined approach will help an investor avoid making the worst kind of emotionally based decisions which, studies have repeatedly shown, are very adept at buying high and selling low.
Ned’s Notes Takeaway: NNs boldly predicts that, in the near term, the market will either recover, go down or stay about the same. Just as confidently, NN foresees that over the longer term, investors with a structured, disciplined and repeatable strategy will achieve their goals at a higher frequency than those who do not.
