As I write this, the TSX has closed down 300 points and the Dow has closed 350 points. I’d say that it was a bad day in the market. It’s a good thing that nothing has changed in my financial situation or with my financial plan. Therefore, I plan on doing nothing.
As an investor, the aforementioned statement should be repeated EVERY time there is sharp volatility in the market (losses or gains). Obviously, this is easier said than done. The reason being that, emotion dictates our actions, regardless of whether or not the response makes sense.The image is taken from Carl Richards who illustrates this that emotion dictates our actions.
Market volatility reflects how we’re feeling right now, and not how we’re feeling tomorrow, next month, next year or over the next 20 years. The June 20, 2013 sell-off occurred after Ben Bernanke, Chairman of the US Federal Reserve commented on the winding down of the Fed’s bond-buying program (aka “quantitative” easing). Unless your financial plan specifically called for changes should quantitative easing end, then you should not be making changes to your plan. The next time you feel compelled to make changes to your portfolio, due to market volatility, stop and ask yourself these questions:
- What did I see that made me go from feeling okay to feeling like I need to do something?
- Did anything actually change in my life in connection with what I saw?
- Do I have any control over what I’m now worried about?
If you answer no, to number 2 or 3, then you are likely reacting emotionally rather than rationally.
