Eclipsing Emotions in Investing
On August 21st we will all get to experience a mid-afternoon twilight zone due to the highly anticipated solar eclipse. Dave Zandstra here at Meridian recently passed out eclipse glasses to everyone in the office, saying he has been waiting for this since he was a kid! Imagine the fear our early ancestors must have felt when viewing such a phenomenon before understanding the astronomy behind it.
Believe it or not, some economists argue market patterns exist that coincide with lunar phases, daylight savings time, and other astrological events. In fact, research exists to back this up- much of it based on the effect these events have on daylight. In the winter months, seasonal depression brought on by little daylight allegedly causes investors to hold a more conservative risk tolerance. In a similar vein, more than one financial behaviorist has predicted that the fear brought on by watching the eclipse, even in an age where we understand the cause, could stir up a small market panic.
This potential disruption in the rising market comes at an interesting time. The Dow recently crossed 22,000 and continues to reach all-time highs each month since last November’s election. U.S. government bonds, the risk-free alternative, pay almost nothing. Economists and market experts banter back and forth, some claiming that we are on the brink of a collapse and others feeling comfortable in the climb. But we are all truly in the dark when it comes to predicting market movement.
Investors seem to understand a balanced portfolio cannot earn outsized returns moving forward in this environment. So what is the best thing to do facing a raging bull market and an impending solar eclipse? Most balanced portfolios have earned 5 to 8% so far in 2017 and 10 to 15% since the election. My advice for those in balanced, thoughtfully managed portfolios is to enjoy the eclipse, leave your portfolios the way they are, and savor the gains. The reality is that the moon and the sun do not affect the market, but market participants’ emotional responses do (and for the record, I would not recommend placing money on those).
It’s also possible you have been sitting on cash or money market for some time, and now suffering from regret. First, do not dwell on past mistakes. Next, formulate a long-term financial plan that marries your portfolio to your personal goals, not to some market index. Devise a specific investment strategy to meet those goals. Then sit back and resist the urge to overhaul that strategy next time the market stumbles or the moon covers the sun.
Develop the resilience to stick with your strategy regardless of the season, lunar cycle, election outcome, whatever. If you are not a risk-taker, don’t rebalance yourself to stock-heavy investments. Although a 22,000-point Dow might sound great, you will ultimately buy high and sell low if you have not properly planned. Don’t let the excitement brought on by the news or the hype surrounding any event to affect your savings strategy.
An edition of this column is to be featured in the print version of the August 20, 2017, Knoxville News Sentinel.
Meet the Author
Tom Coulter, CPA
Tom is the President and a founder of Meridian Trust. Tom graduated from The University of Tennessee, Knoxville, in accounting with honors, in 1978. Tom previously worked for the international accounting firm, Deloitte. He later joined the financial medical advising firm, FIS Associates, before founding Meridian Trust in 1997. Tom has worked extensively in retirement planning, taxation, estate and financial planning and investment management. He is a Certified Public Accountant, a member of the American Institute of CPAs (AICPA), and the Tennessee Society of CPAs (TSCPA).
Tom is also credentialed as a Personal Financial Specialist (PFS) by the AICPA.