Data and research suggests our emotions get the best of us when we invest. When markets tank we tend to get fearful and sell. When markets boom we tend to get greedy and buy. Therefore, as the Dow and S&P seem to be pushing new all-time highs daily, I think it is valuable to remind investors that it is just as important to stay disciplined during good markets as it is during bad markets.
I’ve had many conversations with clients, friends, and family during the recent bull market. A common theme is comments on how they might be willing to take more risk since markets are doing well. Think about that for a minute. We know the markets move in gyrations. How much longer will this bull market last? No one knows for certain. What we do know is the markets, as measured by the Dow or S&P, are at or near all-time highs. Is that really the best time to be dumping money into the stock market? If you shop at The Gap, would you rather buy a shirt for $40 or $20?
So what should investors do? They should work with an investment fiduciary to create a mutually agreed upon asset allocation and rebalance accordingly. When markets are up you sell your equity positions at a high. When markets are down you buy equities at a low. In each instance you are rebalancing your portfolio to specific asset class targets and following a systematic pattern of selling high and buying low – the exact behavior you want to adhere to as an investor.
Remember the Warren Buffett adage, “Be fearful when others are greedy and greedy when others are fearful.”