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About personal finance, investments and markets.
February 15, 2016

What investors should be doing right now

Markets are off to a tumultuous start for the year as many indices show close to 20% losses in less than six weeks. Panic is in the air and no risk assets have been spared at this point – even the FANG names that were the key drivers of the 2012-2015 bull run. How should investors respond to increased market volatility?

Economists are fond of saying „there is no free lunch“. In real life, this means, that if you want something nice, you have to pay for it. In stock investing this goes beyond paying an investment manager. You, the investor, have to be willing to put up with market declines. That is the admission fee for long-term returns.

Investors who try to avoid market volatility will lose out. As stocks were crashing in 2009, Warren Buffett’s partner Charlie Munger was asked how stock investors can avoid big declines. He responded:

It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go.

Psychology kills most investors. Emotions make investing all but impossible for most people. In bull markets, greed makes people ditch conservative balanced funds for hot sector funds. When volatility hits, fear trighers flight-or-fight insticts and flight usually wins.

Here are four simple rules that hopefully help you hold your nerve:

1. Don’t check your account every single day
Constant updates make investing more emotional than it nees to be. If you plant a tree, you don’t dig up the roots every week to see how it is growing either.

2. Past market corrections are viewed as opportunities, but all future market crashes are viewed as risks
If you can recognize the silliness in this, you are already on your way to becoming a much better long-term investor.

3. Diversify
Diversification is about accepting good enough to avoid terrible. Yes, investors sometimes miss out on great when they diversify but the downside risk of being too concentrated in the wrong asset class at the wrong time is just too big as it can completely destroy a financial plan.

4. Short-term thinking is the root of most investing problems
The real problem everybody is trying to solve is saving for some goals in the distant future. Either retirement or kids‘ eduction or a house or something similar. But most investors worry about the day-to-day movements of their account. If you can focus on the next 5+ years while the average investor is focused on the next five days, you have a powerful edge. Markets reward patience more than any other skill.

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