Market Fluctuations: The Best Reaction Might Be No Action

Oct 16, 2014 | BDE, Investing, Wealth Management

The best tools for success in investing are: a sound strategy that fits your financial situation and your long-term goals; a diversified portfolio of global equities, fixed income, and commodities; the patience and discipline to stick to your strategy for the long term so that your wealth can grow.

Achieving this last ingredient, especially, can be easier said than done. The best response when the markets go down is to do…nothing. It’s the simplest and yet hardest thing to do. It’s human nature to want to react to market fluctuations. After all, we have a fight-or-flight instinct that serves a very good purpose – it keeps us alive! But in investing, that instinct primes us to make irrational decisions. When the stock market seems to be going up, people jump to buy stocks. When the stock market dips, investors rush to sell. This leads to buying high and selling low–which is the exact opposite of what creates wealth.

Plus, this instinct is amplified by a few other factors. For one thing, the media floods us with information on a 24/7 news cycle, and the headlines tend to focus on extremes, generating a lot of excitement or a lot of fear. Another factor is that there is a powerful psychology involved. We feel the effects of losses far more potently than we do the effects of gains. This is human nature, and the simplest yet most difficult aspect of successful investing is ignoring it. Investors must detach their emotions and maintain a levelheaded, logical approach.

It’s hard to be impartial and unemotional, but making emotional decisions about your investments hurts you in the long run. Investors have to let the science of markets be their guide. Remember, decades of market data show that it is over the long term that we see the market noise smooth out, and the overall trend point up. Long-term success requires withstanding short-term market fluctuations. Start by investing wisely in a diversified global portfolio of stocks, bonds, and hard assets, remain logical, and stick to a sound strategy despite market fluctuations.

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