So what is it about a campfire that we find so mesmerizing? The sense of community, the inherent danger of a destructive force, contained somewhat, for the enjoyment of those present? I don’t know. Maybe it’s just something to stare at while you figure out what to say next. Regardless, it makes for a great environment. I was afforded such an opportunity this last weekend, as a matter of fact. As part of his son’s birthday party, a friend invited the dads along to hang out by the fire while the kids ran around with flashlights. Who would have thought that running around in the woods, in the dark, would have been safer than sitting by a fire? Not me. But that’s what I get for thinking, I guess.
Adhering to campfire etiquette, I took a turn scouring the woods for firewood. Almost immediately, I happened upon one of those little trees which grows out of the base of a bigger tree. “Hmm,” I said aloud. And at that moment, my gut says, Dude, you can totally rip this thing down. Nonchalantly, I gave it a few cursory pulls to gauge the resistance. See, my gut offers, you got this! That’s it, I thought. This tree is mine! So after some serious pulling and heaving…snap…snap! The first snap was that of the tree finally giving up the ghost. The second was my ankle’s response to my torso rolling up on it. Two things were accomplished with that lapse in judgment: One, the tree was down - thank you very much. And two, there was no shortage of things to laugh about around the campfire. Here’s what I know to be true:
Your gut may not lie to you. But that doesn’t mean it’s always right.
For example, and more to the point, people are tempted to listen to their guts during market declines. And what do you think their guts tell them? Let’s listen:
“Ugh, look at what the market did today. You can’t take many more days like this.” [Then after another week of declines] “All right, what’s going on here? You need to do something about this. You can’t keep losing money. Maybe you should sell and go to cash for a while, you know, until things settle down.”
Let’s assume this is your gut talking. And who could blame you, right? It’s unsettling to watch your balance drop. So, after consulting with your gut, you feel you need to take action - so you sell. Then you watch and wait… and after some amount of time and a series of market increases, you figure it’s safe to get back in – so you buy. Sound familiar? Well, you’ve likely broken the first commandment of investing:
Thou shalt not sell low and buy high.
“So what would you have me do?” you ask, “just ride it out…do nothing?”
No. I would echo the sentiments of our Chief Investment Officer, Marshall Bolden:
“I think the best course is to evaluate what is driving, or thought to be driving, market movements, and then determine a prudent response. If there is fundamental deterioration in the economy, the markets have become overpriced versus long-term averages, or some similar factors exist, it may be wise to alter the investment strategy by reducing risk. However, an improving economy, low market valuations, etc., might mean that added risk is a wise option.”
At the time this post was written, one would characterize the economy as slowly growing and in a period of fundamental improvement. That being said, I’m not suggesting that you don’t need to make changes to your investment strategy, okay? I’m just stating there’s little wisdom in making wholesale strategy changes based on the day’s news cycle.
News cycles determine short-term market movements
while fundamentals lay the groundwork for long-term trends.
The real driver in your investment strategy should be the financial plan you’ve created. Your plan should have more influence on your strategy than the price of oil on Tuesday, the price of tea in China, China itself, and yes, maybe even more than your gut.
So, a week later, I’m still hobbling through my gut’s recommendation. I’ve been able to enjoy crutches, watch the purple accented aurora borealis dance upon my foot - all for a piece of wood that was too green to burn in the first place. Don’t be campfire discussion. Your gut wants what’s best for you, to be sure. But in my experience, at least, it doesn’t always know what that is. You and your gut need to find a financial advisor you both can trust and allow them a say in the matter. All of you will be glad you did.
Disclaimer: One tree and one ankle were hurt in the making of this blog post.