By Roger Whitney
The S&P 500 has set multiple all-time highs this year, a climb that's been welcome news for equity portfolios.
Generally speaking, at least.It's also making many investors anxious, some extremely so. Considering the last few years, the urge to fret is understandable. In the wake of the market meltdown in 2008-09, investors rushed out of stocks and into "safe" investments, vowing never to go through such a downturn again. To make matters worse, that market turmoil itself came less than a decade after the dot-com collapse.
Now, nearly five years later on, the shareholding public is wringing its hands as the S&P continues to ascend the mother of all walls of worry. The concern here is that, as Rob Arnott of Research Affiliates puts it, we're only picking up nickels in front of a steam roller.
So is the sensible approach to add to your equity allocation since markets "are good," or to get out while you can? Clearly, not every period is going to be higher, or even flat. Markets, we know, do lose ground sometimes. And at least one measure with a good record is signaling the coming few years may show no growth or a decline for stocks.
But you can deal with the turbulence by adopting a few key behaviors. Proper restraint and concern for your capital is one thing. Outsized fear is another, and that's what's to be avoided.
Over the last 20 years, the S&P 500 has had an average return of 8.2%, while individual investors have averaged 2.3%. The reason behind much of this investor under-performance is something known as the behavior gap. Carl Richards, author of The Behavior Gap: Simple Ways To Stop Doing Dumb Things With Money, says that we are "wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right -- but it's not rational."
You can take steps, simple steps, to shrink this gap. No complex formulas, no obscure risk models. Simple. Next time you're tempted to let anxiety take over, think of these. You might just worry less about the market and make smarter financial decisions if you do.
The future is inherently unknowable. This is a fact. Most of the time we accept it at face value, but doing so is absolutely critical when it comes to your investments. And yet, every year, billions of dollars are spent trying to predict the direction of the markets.
Don't dwell on it. Individual investors tend to spend far too little time managing the things that actually can be controlled, such as their own behavior and decision-making processes. Ensuring you worry only about what you can in fact be responsible for is the beginning of your new, better way.
Stop the media overload
Limit your exposure to the financial press. You don't have to ignore it entirely, just keep it to a minimum. Too often, business television, radio, magazines and websites are merely "newstainment" designed to mirror the collective pessimism or optimism of the day.
Since 2008, financial newstainment has been dominated by fears of a broad economic collapse. More recently, it has been about the dangers to the economy when the Federal Reserve begins to wind down its massive stimulus program. This type of coverage is designed to create the anxiety that will keep you watching.
In a recent Psychology Today article, Graham C.L. Davey, Ph.D., asserts that "not only are negatively valenced news broadcasts likely to make you sadder and more anxious, they are also likely to exacerbate your own personal worries and anxieties."
For one month, try to dramatically curtail your consumption of newstainment. That alone might make you feel more intelligent and confident when it comes to your investments.
Avoid timing disasters
Chasing performance is a loser's game. You don't have to pretend the past didn't happen or is completely irrelevant -- consider it, by all means. But what matters much, much more is how an investment fits into your entire portfolio and how repeatable it may be.
Studies show that investors place too much weight on recent past performance, despite the fact that it's a poor indicator of future results. Research tracking fund flows regularly reveals that individuals tend to have awful timing, buying what's expensive and selling what's cheap. By concentrating on long-term strategic decision-making, you can lessen the urge to chase short-term performance.
Focus on why you invest
You invest to preserve and grow your assets so that you can achieve the goals you care about. Repeat that to yourself. "Beating the market" has nothing to do with your life, so don’t frame it that way.
If you just want to cross the street, would you blindly sprint into it? Not if you're prudent. If you take care, you're going to look both ways (twice) and simply walk across. The same concept holds for investing. Spend your time figuring out what you want longer term, and what needs to be done to get there. You might not need to run as fast you think.
Again, simple ideas. Put these concepts into practice, and you can be on the path right away to making smarter investment decisions.
Roger Whitney, CFP, CIMA, CPWA, co-founded WWK Wealth Advisors, a Registered Investment Advisor, in Fort Worth, Texas. He has specialized in investment management and planning for 23 years. He's on Twitter @roger_whitney.
- Personal Investing Ideas & Strategies