Try To Think Rationally

I’m fully aware that the title of this post is almost impossible to act upon when it comes to the stock market. Yet, it is vital to display this characteristic if you ever want to make money in the market, especially in (seemingly) perilous times, akin to these past couple months.

You’ve got to be aware and remember that when it comes to money, two of the most primal human emotions are at play: fear and greed. And to zero in on your mindset even more, others may wonder whether one plays a bigger role than the other.

Well, one definitely does and it’s fear. Renowned behavioral psychologist and Nobel Prize winner in Economic Sciences, Daniel Kahneman, author of “Thinking, Fast and Slow” (great read on how the human mind process information and acts upon it, namely in times of stress) has confirmed this supposition.

He posits that people are generally loss averse when it comes to money decisions; i.e., losses hurt a hell of a lot more more than gains. You see this in sports. Ask any coach and they’ll tell you that losing the championship hurt much worse than the euphoric feeling of winning the championship a couple years back.

With that being said, as of my time of writing this, since January 14^th of this year, when things got extra dicey, we currently stand being up 1.35%. That may surprise a lot of people due to all the doom and gloom you hear on TV and read online (occasionally in print as well).

By no means is this a referendum on bears to proclaim that we’re in a bull market that’s about to rip to the upside, or vice versa. My point is that, unless day trading is your forte, you cannot base your portfolio and investment decisions on every day movements.  You will get scared out of them all the time.

I’ll be the first to admit, it’s happened to me multiple times. Whoever says they haven’t, whether their positions were bullish or bearish, are either lying to you or do not have enough experience to tell you any sort of advice.

So what does someone do? There a couple options, which are dependent on whether you have a money manager or if your account is self-managed. Buy and hold sounds myopic and simple, but we as humans, are not wired to withstand the pain that comes with it. Very few can take the medicine.

First off, if your account is self-managed, I highly encourage you to “stress test” your strategies i.e., come up with different levels of hypothetical losses (10%, 25%, 50%, etc.) and whether you believe you can withstand seeing various levels of unrealized losses, and what you will do in times of market panic.

Additionally, you must have some sort of medium term thesis as to where the market may go (ranging from 3-6 months, no more though) and confirm that your selected strategy will match that thesis. If you can’t come up with one on your own or are simply unsure, find and follow a source that’s transparent with his or her recommendations (hint: highly unlikely this person will be on CNBC).

What happens if the tide goes against you after a reasonable amount of time, not day to day? Then you must reassess that thesis. Any good investor has a general belief and sticks to their guns, but does this in a disciplined manner.

This means that you will encounter losses, but minimizing them must be in the plan. The amount of losses you think you can take will be determined by your risk profile (age, reason for funds, disposable income, family situation (married, have kids, taking care of parents/siblings), etc.)

Realizing the actual risk profile of one’s self is no easy task, but it’s so important. I thought my tolerance was high; but when the crap hit the fan, turns out it wasn’t. And that’s okay… I’ve balanced that out by taking on more risk in my brokerage account and being much more conservative in my Roth IRA.

Second, if a money manager is being used, ask them what their actually strategies are to help achieve your financial goals and what the plan is if the market falls by x%. Honestly, if they cannot explain it in a clear and concise fashion, take the cash somewhere else or have it self-managed.

Anyone can learn the basics and will probably beat 90% of “professional managers” as long as your plan is simple, easy to act upon, and cost/fee conscious. I mean, studies have shown monkeys randomly picking stocks have done better than the average manager. Seriously, no joke; google it.

Not one sane person acts upon a service that they don’t understand. Tell me someone you’ve ran across that’s had their house painted in an unknown color, and I’ll show you a maniac.

The point of this post is that whatever you do, stress test your pain tolerance and have an actionable plan in place, based on your risk tolerance and profile. To sum it up, your money should be managed in a method that allows you to sleep at night. Plain and simple.

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