What’s your (Money) Story?
And the “Illusion of Control” during market volatility:
One of the reasons I got into this business was because of a stock trading account I had started just before 08-09. At the time, there were a ton of online brokers advertising towards hot shots like me – overly confident, paid too well and no idea what I was doing – with messages like “day trading is the (fastest) way to accumulating wealth.”
Today, we know that trading too often does not necessarily equate to growing your net worth (in fact, studies show it often does quite the opposite); and that it is the quintessential “illusion of control” behavior. Illusion of control is when we think by doing a certain thing or acting a certain way, that we can meaningfully impact or change an outcome of a situation. And sometimes it is in our human nature that when things aren’t going a particular way -- our way -- we need to take control of the situation, and act.
It is very easy, when your net worth has taken a 10, 15 or perhaps even 20% hit in just a few short quarters (which many stock investors experienced throughout 2022) to fall into this train of thinking. However, this type of fear-based thinking can often make matters much worse when acted upon.
I recently was on a conference call with a client, and we were discussing the drawdown in that person’s portfolio value from its previous highs. After I got done with my spiel on how I’ve aligned things in the portfolio, including how much cash I’ve set aside should things continue in this direction, I said “and remember - time is the great equalizer, and unfortunately time takes time.”
There was an uproariously laughter on the other end of the phone, followed by the comment, “Boy, you’re full of good ones today.”
In other words… “no sh*t, Sherlock.”
Look, I get it. Its exceptionally challenging right now to stick to a plan, much less not react by grabbing the wheel and taking control. Looking at our portfolio today is disheartening. However, if we try too hard to instill our will then we might make a problematic situation much, much worse.
I am not suggesting that inaction is the appropriate response during market volatility, either. There are steps you can take during market downturns, which I believe can provide peace of mind to weather the storm. Those steps are:
Make sure you have 3-6 months worth of emergency cash; and for those in retirement - at least 18-24 months worth, in some type of FDIC insured cash-equivalent vehicle.
Continue systematically investing! For those saving for retirement - do not stop your 401k or IRA contributions and, if you can - try and increase the dollar amount or percentage you are putting away!
Rebalance your portfolio. Going into this year, if your initial targeted portfolio allocation was 70% stocks and 30% bonds (for instance), chances are those percentages have drifted considerably from their targets. By rebalancing and bringing those targets back to their intended weightings, you are taking advantage of short term mark fluctuations while restoring your targeted “risk-reward” profile.
