Market volatility is discomforting. No matter how much you prepare for it, it is never easy. The same discomfort investors thought they were once willing to withstand now seems unbearable. The discomfort starts to penetrate the “invest for long term” fortress investors had built. The feelings of “this time is different” come rushing forward. Panic sets in.
Behavioral Finance
Rest assured these are all normal feelings. There is a reason why people have won awards for studies in behavioral finance. It’s a real issue. It is helpful to be reminded that the past looks obvious, the present is uncomfortable, and the future is unknown.
Only in hindsight can you see what happened. We never know how close the result could have been changed had something gone a little different. This is where the “future is different than the past” hides out. Sometimes those things happen and sometimes they do not. To make things even more difficult, that one thing is usually different each time.
Investment Crossroads – Fork in the Road
Each stressful situation along with the discomfort feeling usually causes people to arrive at a decision point. The fork in the road for the decision can sometimes be labeled “Grit Left and Quit Right”. Each path might be acceptable depending on the journey. Let’s talk a little about each path and why it might be the preferred path.
The Grit path creates a certain image for most of us. Strap on the work boots, put the hard hat on, pack your lunch, keep your head down, and grind to the finish line. Not exactly roses and rainbows. The upside of this path is the vision of what lies at the end of the path. Getting to the end gives the feeling of accomplishment and perseverance. The path was difficult, but you made it to the finish line. It was worth the effort.
The Quit path also creates a certain picture. Somewhat the opposite of grit. Visions of despair and hopelessness. The ringing of “quitters never win” mantra from a parent, coach, or boss comes to mind. Where grit is associated with winning, quitting is normally associated with losing.
The process of investing is always intersecting with these decision points. Here are some things we think about concerning the grit or quit paths.
- Grit Strategy:
- Long-term investing. History says the more prolonged the potential investment horizon, the more likely the positive investment returns. Long-term investors get rewarded for showing grit and ignoring short-term movements.
- Diversification. A well-diversified strategy is better able to withstand short-term shocks. One specific stock or event has less of an impact on the overall portfolio.
- Quit Strategy:
- Short-term investing. Markets can move quickly so short-term investors should be ready to quit at a moment’s notice.
- Leverage. Funding investments with debt can be very risky if values start to decrease. The lenders will force investors to sell their securities to pay back the debt if prices go lower. This can cause circular effects where lower prices cause more selling. Thus, investors purchasing securities with borrowed funds should be ready to quit if see trouble ahead.
- Single stock investments. Bad things happen suddenly to good and bad companies frequently. Those bad things may never turn around after that initial drop. Non-diversified investors must be prepared to quit.
There is usually never one answer for all scenarios. “It depends” is typically the answer. However, we think it is helpful to remember what game you are playing and what skills are required to win that game. For longer-term investors, grit can be a very valuable resource.
Happy Thanksgiving
The Holiday season has arrived with Thanksgiving this week. Our office has much to be thankful for. We are blessed with amazing clients that trust us to help them through their financial journeys. We cannot say this enough, thank you for that continued trust!
We sometimes even have the opportunity to support them as they do great things in the community. Here is a picture of our team and family posing with the star “Hannah” in the play THE SPITHOUSE GRILL at the Sunset Playhouse.
Through our company matching gift program, we are also fortunate to support organizations in our community. Our team members have made financial contributions to support these causes, so we are happy to support those as well.
For example, these charitable organizations support student education programs, youth community programs, single mom programs, poverty and homeless outreach programs, mental health education and support programs, and older adult care programs.
From your McCarthy Grittinger Financial Group team, we hope everyone has a Happy Thanksgiving!