It’s natural to react to market, economic, and geo-political turmoil in the moment. This is a common mistake to make.
In 2009’s global financial crisis, it was natural to abandon the stock market – just at the worst time to lock in losses. Same was true of the onset of the COVID-19 pandemic, though one had less time to react before the market explosion to the upside. Today, the Ukrainian invasion and sanctions against Russia may prompt the opposite reaction – the buying of gold, oil, base metals, and agricultural commodities at present historical highs. Once again, being tempted to react in this situation is only natural.
Successful long-term investors rely upon discipline. When the equities in our balanced portfolio temporarily decline in value, our risk profile dips below our target. The consequent reduced risk threatens our longer-term financial objectives. Discipline forces us to buy to restore our target. Later, when equities recover, those purchases result in a risk profile above our target. We sell to restore it. Simple.
This generally requires the steady, unemotional hand of a professional at the helm. Yes, there are non-professional investors with nerves of steel, but they are truly rare. The continuous process of buying at low prices and then taking profits when they recover is a slow and steady one, whereby professionals enhance returns over time above a simple buy-and-hold strategy, while better managing the key element of risk.
We cannot control or predict markets. What we can do is control, monitor, and manage risk. So, let’s keep our eyes on that ball and away from the distractions of the moment.