Think for Yourself
“Be fearful when others are greedy and be greedy when others are fearful.”
– Warren E. Buffet
Give yourself the following quiz. To how many of the questions below can you answer “Yes”?
- Did you load up on technology stocks in 1999?
- After the events of September 11, 2001, did you sell your stocks or stock mutual funds?
- Did you sell stocks or stock mutual funds when the market bottomed out in 2009?
- In the first half of 2014, did you decide that it was finally “safe” to get back into the market?
- Have you been tempted to sell stocks (or did you sell) in the past six weeks?
The “repeat until broke” sketch above illustrates the unfortunate plight of many investors. Even though we know better and intend to do just the opposite, many investors end up buying securities near market peaks and selling when markets are tumbling.
Think back to how you felt during the “great recession” of 2009. Foreclosure and job loss dominated news coverage. Everyone was frightened and talking about how risky stocks and stock mutual funds were. The experts proclaimed that getting out of the equity markets was the wise and prudent thing to do. Gold prices soared.
Earlier this year the pundits were saying that it is once again “safe” to be in stocks. Now that stocks have increased in value by 200% since 2009, does it make sense to say that stocks are safer today than they were 5 years ago? One could just as easily argue that after such a run-up, stocks are starting to look overpriced. Instead of loading up on more, it could be time to take some winnings off the table.
A successful investor recognizes how the human brain works and the fact that your mind has a tendency to work against your money. Our human nature compels us to do something when we experience discomfort. We are particularly vulnerable to financial forecasts and opinions from others when the markets are at all-time highs or all-time lows. These “mass market” recommendations don’t speak to our own goals or circumstances. Unfortunately, the messages we are exposed to can distract us from our guideposts and encourage us to abandon perfectly sound investment strategies. If you have a well-thought-out approach to achieving your financial goals, the best course of action is often to do nothing at all.
We give in to the emotions of fear and greed when we let others manipulate our thinking. We all know that television reporters, friends and relatives cannot predict the future. Neither can economists or Wall Street pundits. You may need to remind yourself that a person who has the ability to actually predict the future would not need to report to work every day! None of us has any idea when the stock market or interest rates are going to go up or down. I cannot say when or if real estate (or gold or commodities) will collapse or skyrocket. And neither can anyone else. The good news is you do not have to predict the future in order to be a successful investor.
Experience has confirmed the importance of simplicity when constructing a financial plan. And because a financial plan only has value when it is followed, it must be both relevant and livable. Understanding the investments you own and why they fit your particular goals is a step towards thinking for yourself. This will help you stay on track when the next financial crisis hits because you will have the confidence that you are doing the right things to accomplish what matters to you.
You will find it much easier to think for yourself if you do not own a portfolio full of overly complex investments. Never associate complexity with intellectual superiority or investment advantage. Avoid complex and expensive financial products (e.g. hedge funds, private placements, structured products, etc.). Investment products with lots of bells and whistles can be just as confusing and distracting as the “talking heads” on television or radio.
With this understanding, you will be better off as an investor if you ignore what “everyone” is saying, make a detailed – yet straight-forward – financial plan with specific goals, and stick to your plan no matter what Jim Cramer, your brother-law, or any other”expert” says.
All of this is easier said than done. Give us a call if you need assistance.
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.