The trouble with investing is that what feels right is often wrong and what feels wrong is often right.
It’s all backwards.
Investing feels comfortable when the markets have been performing well. When you see other people making money it feels like a good idea to put your own money to work. After all, it looks easy.
When investments continually increase in value, it begins to feel like the gains will go on forever. But the opposite is also true. When investments continually lose value, it begins to feel like nothing will ever stop them. Neither feeling is right, but both are hard to fight.
Something always gets in the way of runaway gains and never-ending losses. Something always turns the tide in the market. Unfortunately, the timing is never known.
In fact, the market has an uncanny way of testing us. The most steely-nerved investors – the most experienced investors – can just as easily get swept up in bull markets and flushed out in bear markets. No one is immune. Why? Because everyone feels emotions.
And make no mistake, emotions are the enemy of rationale investing. As it turns out, making big money and losing big money are both intensely emotional.
It’s greed and fear.
We know what we should do, but it can be tremendously difficult to actually do it.
Either your friends and neighbors are making a killing in the market and you’re not, or your account is getting decimated by brutal selloffs and someone else is making money on gold, or cryptocurrency, or some other odd-ball investment. Sometimes it feels like you can’t win.
It’s easy to remain in the investing seat when markets are rocketing higher. That’s fun. It’s only when markets are free-falling that investors begin frantically searching for the ejector button.
Losing money is, at a minimum, uncomfortable. For many investors, it’s flat out terrifying. Watching an investment account get slashed by market selloffs can force some investors to make desperate and destructive decisions.
Indeed, most mistakes are made by investors when markets are crashing.
During those times it feels like you should do something, anything, to alleviate the painful feelings of losing hard-earned money. You’ll know you are in that panicked mindset when you tell yourself, “If this continues, I’m going to lose everything. I need to make a change now before I lose even more money. Look how much I’ve lost already!”
But keep in mind, when it comes to investing, it’s all backwards. The best advice when markets are crashing is to sit and do nothing.
In fact, generally speaking, the right proportion of doing nothing to doing something in investing is about 95-5. In other words, 95% of the time, you would be better off leaving a properly constructed portfolio alone. Don’t touch it. Don’t think about touching it. Don’t talk about touching it. Don’t think about talking about touching it. Leave well enough alone. Only 5% of the time might it be advantageous to make adjustments. And that’s usually when your account has suffered uncomfortable losses. Turn the tables and see those moments for what they really are – opportunities to buy, not sell.
People seem to think those proportions should be reversed.
The most successful investors, however, are like pinch hitters in baseball. For the most part, they sit back and watch the action on the field. Occasionally, the right situation presents itself and they go to bat, looking to make a difference. Instead, investors often act like bat boys – constantly moving and always in the middle of the action. Just remember, bat boys don’t make the big bucks.
In truth, ‘sit and do nothing’ is almost always the best course of action when it comes to investing. Even when it doesn’t feel right.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at justin.lueger@invisorgroup.com.