Keep A Steady Hand on the Tiller

The market just dropped, again.

Related to this, I thought it would be good to re-post this piece (a longer version was published in 2015).  Previously, I penned these lines:

“If you followed the market today, you will have seen and heard quite a few market headlines that might raise concerns. The following are some examples:

‘If your pension, retirement savings or 401k is invested in the stock market, you lost big today’

‘The stock market plunges and drops 530 points and more than 1000 points for the week’

First, remember that the financial media thrive by writing colorful headlines, which draw eyeballs and hence sell advertising.

It has been a crazy few weeks for investors though.

China’s stock market – after one of the biggest run-ups in history – has dropped approximately 40% in just a few weeks. Greece is still in the news with the talk of new elections, and oil and other commodities are also down sharply.”

Greece isn’t currently making the headlines the way it did in 2015, but China and other concerning stories are certainly being circulated.

What should an investor do, this time?

The best advice then and now might have come from my then 10-year old son, Jack, on a day that the market dropped 530 points. It was summer and he was telling me about his day on the water in sailing class.

Jack said, “Dad, today the wind was strong and it was a little scary at first. I remembered what my teachers said though, kept calm and just stayed on course.”

Staying composed when storm clouds bring bad weather is not easy but, just as keeping a steady hand on the tiller and staying calm is the key to reaching a port safely, avoiding the urge to make changes in volatile markets is the key to long-term investing success.

Over the years, I’ve written many commentary pieces after market falls (concerns over 50-year floods seem to come every 5 years or so in the stock market).  My message is always the same.

Make sure you have a solid long-term plan (emphasis on long-term) that is prudently diversified and designed to meet your goals, not the investment models of others.

I know it is hard to avoid getting emotionally drawn in by market headlines, but try to remember that investing should be a means to an end, not a competition.

Try to stay anchored on your plan, versus getting caught up in the day-to-day.

“Keep calm and carry on.”

This is very difficult, by the way, and many investors (professionals included) make poor decisions at the wrong time.

What can we do to be better investors?

Have A Long-Term Plan That Is Designed to Meet Your Individual Goals

  • Investing should not be a competition
  • Unless your goals have changed, do not throw out a good plan with a bad market
  • If you don’t have a written Investment Policy Statement (a plan), find someone to help you develop one.

Set Investment Policy Max. and Min. Ranges

  • Everyone will be wrong from time to time
  • Set limits on the upside and downside before you invest
  • Max. and Min. ranges should help to control emotions and hence risk

Be Contrarian

  • Wall Street predictions and consensus are often wrong (see Groundhog Day)
  • Large flows into and out of an asset class are often a sign of a top or bottom

Place a Premium on Liquidity

  • Don’t invest in illiquid investments unless the rewards being offered are compelling
  • Don’t blithely pay higher fees for lower liquidity

Understand True Risk Exposures of All Investments

  • As an example, high yield, international bonds and distressed debt don’t have the same risk as other bonds
  • Remember, alternative strategies are often based on complex models and complex investment theories, and theories are, well, theories

Remember Taxes and Fees

Don’t Be Sold

  • If you don’t fully understand it, don’t buy it
  • Always ask for complete transparency on all fees, risks and conflicts (see Stop It or Fake News).

Slow, Steady and Boring Often Wins

  • As with many things, in investing, the tortoise consistently beats the hare, but often with more peace of mind and less heartburn, which makes it easier to stick to a long-term plan.

As my son (now 13) has consistently learned on the water, conditions are often out of our control and can change rapidly.

Be prepared and stay broadly diversified.

Don’t reach for returns.

Keep focused on your long-term plan and don’t be sold the hot investment strategy.

Staying with the boating theme, and an old tried and true saying, make sure your “ventures are not in one bottom trusted” (Merchant of Venice – Shakespeare).

The past few days and weeks have brought some market storms, but remember, history consistently teaches us that true long-term investors (who will in practice come in for the most criticism – thank you Sir Keynes) will continue to be rewarded for keeping a steady hand on the tiller.


For more on how normal market drops are, read the following (it includes a Cycle of Market Emotions chart that we’ve all experienced many times):

The Normal

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