Calm Thoughts: Stick With The Plan
Is your internal voice nervous right now? “Should I do something?” it asks. “What’s not working?” it wants to know. “Have I made a mistake?” “What should I do?” “How do I fix it?” They are nagging at our minds.
Financial markets have become volatile in 2015 and many indexes are currently posting losses for the year. Imagine that. Stocks go down! Sometimes they do it quickly (September 2008 – March 2009) and sometimes it takes longer (2000 – 2002). Sometimes they go down a little and sometimes they go down a lot. Sometimes it’s because of a recession and sometimes it’s not. Whatever it is, it is important that you remember this is what stocks do.
During these down periods or market cycles you will have to decide how you will respond. Are you going to get sucked into what the market does every day? Are you going to focus on what your account value was three months ago and stress about your “losses?”
Hopefully you have the other calm, rational voice that reminds you of your long-term plan. A pretty well thought out plan in fact. A plan that involves boring years and periods where returns don’t meet your expectations. This voice should remind you that this would happen at times. It doesn’t necessarily make it easier to remember that, but it ought to handcuff you from reacting to monthly statements or daily headlines.
Here’s what you should probably do when stocks go down: nothing. Boring advice, I know. But usually you should do nothing. The problem is that what “looks broken” to us is based on our desperate need for immediate gratification and split-second feedback about our decisions. But split-second feedback makes us absolutely terrible investors. In the moment, we can’t take the long view, so we need to listen to our past selves about why we made the plans we did and how we already know what to do in these situations.
Sometimes there’s an opportunity to take some tax losses. Sometimes it will warrant rebalancing. Most of the time you’re going to do nothing. We’re not good at doing nothing but give it a try.