Markets = Feelings

As of close on August 21, 2015 the TSX was down 5.6% (CAD) for the week (-7.9% YTD) and the S&P500 was down 5.8% (USD) for the week (-4.3% YTD).  I’d say that it was a bad week 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, emotion dictates our actions, regardless of whether or not the response makes sense.

This is best illustrated by the below image and explanation by Carl Richards.

Market = Feelings
Source: Carl Richards, of Behaviour Gap

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 August 21st sell-off occurred due to concerns of the health of the Chinese economy.  Unless your financial plan specifically called for changes should the health of the Chinese economy deteriorate, 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.

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