A way to think about market ups and downs

February 22, 2019

Michelangelo once said of his statue David, “David was always inside the block of marble. It was just a matter for the sculptor to hammer and chisel away the pieces that didn’t belong.”

Today I want to chip off a few pieces of marble that may be getting in the way of your investment David. As the stock markets declined in the fourth quarter of 2018 then rebounded strongly in 2019, emotions affected many investors.

To help mitigate the emotional roller coaster that markets construct, here are three cognitive approaches you may want to consider:

1. Remember that whether markets go up or down, the shares you own in indexes or other investments are still the shares. A share represents an obligation on the future earnings of the business or the bond. Tracking the number of shares you own, and the dividends or interest those shares pay you, will help you to view your investments as a business that builds over time.

2. It's a big mistake, as markets rise, to look at your statements and think "I am now worth X." Markets do not go up in a linear fashion, so once you establish that baseline, you will see any decline as a loss. Instead try to think about your portfolio as "X minus 20%." Don't go around saying this to people: if you approach someone and say "I am X minus 20" they are going to think you're a few sandwiches short of a picnic. But if you are going to be a good investor, you should not think in the style of "high water mark."

3. When markets move a lot, your mind will try to interpret what is happening. This is instinctive behavior. Ancient man who saw a lion charging at him and thought "I should stay here in the open prairie while I consider what the average member of my tribe did in this situation" did not fare well. Your mind wants to react. But remember, markets reflect the knowledge of the world's investors - everyone's opinion is already factored into the securities prices. The news you hear on specific events should not affect your short-term decisions.

Dan Cunningham