To hear bad news, all you have to do is turn on the TV. Every other day another story appears about how we are in a bubble and stocks are going to crash, especially if you listen to the eternal pessimists. On the flip side if you listen to the eternal optimists, stocks have a lot of room to run. So, to which side should you listen?
You can usually find opinions at both extremes. The truth, however, usually falls in the middle. So, the next time you are ready to make a knee jerk reaction to some bad news, think through these mistakes to make sure you are making the right decision.
Trying to time the market and go into cash – It’s hard not to react to bad news because it is in our emotional makeup to protect ourselves. The next time you hear a pundit or a co-worker saying there is a bubble and stocks are headed down, try not to jump on that emotional roller coaster.
Just remember, “When you sell, you have to be right twice.”1 Not only do you have to time it right when you get out, you also have to time it right when you get back in. That leads to the next mistake.
Holding on to cash and not reinvesting – If you have sold some investments into cash, it is hard to figure out when to reinvest. You have heard the adage, “Buy low, sell high,” but implementing it is very hard to do.
Mark Yusko said, “Investing is the only business I know that when things go on sale, people run out of the store.”2
Don’t just sit on cash that is earning hardly anything. Look at market volatility as an opportunity and redeploy your cash into investments with at least a little growth potential.
Short-term thinking – The most common mistake people make is to change their entire portfolio structure based on what is happening right now.
One example is a retiree moving all of his investments into cash because of a conflict on the other side of the world. That is like boarding up your house to protect against a hurricane when the forecast is for an afternoon thunderstorm.
A properly designed investment plan should be able to weather the storms on the horizon. Don’t short circuit your plan by making a knee jerk reaction to the news of the day. Make sure that your investment plan is driven by your goals and values, and stick with it.
1. Fearing a bubble can lead to 5 costly mistakes, CNBC 11/10/14. http://finance.yahoo.com/news/fearing-bubble-lead-5-costly-140000840.html