The Bull, the Bear... and the Possum?
When prices start falling or talk of a looming recession grows louder, investors often feel the need to take action to avoid incurring losses. But sometimes in investing, doing nothing is the best strategy.It’s interesting how fascinated people are with animal symbolism. From the 12th century King Richard “the Lionheart” to modern-day sports team mascots, people just love associating themselves with certain animals. For people of a certain age, we know that boxers can only win if they have the “Eye of the Tiger.”
Naturally, people mainly associate themselves with aggressive and intimidating animals, like lions, tigers, hawks and hornets.Investing has its own brand of aggressive animal symbolism. The terms “bull” and “bear” were supposedly chosen to represent upward and downward trending markets because of the way the animals attack their opponents. A bull thrusts its horns upward while a bear swipes its paw downward.But recent fears about a forecasted recession have me thinking about an animal that few people want to associate themselves with: The possum.
Playing (Mostly) Dead During a Turbulent MarketRecessions are scary for everyone, from DIY investors to seasoned pros. When investors get scared, the first impulse is to do something. Anything. Sell a stock. Sell all your stocks, just do something, because even the prospect of selling at a loss may be less terrifying than not doing anything and watching prices continue to fall.But in some cases, it’s best to just play possum.Back in 2015, there was a news item that got a lot of attention at the time. The investment firm Fidelity conducted an internal performance review of its clients' accounts to determine which investors did best between 2003 and 2013.
This ten-year span, of course, included the worst market period in most of our lifetimes.In a surprising discovery, Fidelity supposedly found that the best investors were either dead or inactive. The accounts that did best were those that were left untouched during the market crash. This included old 401(k) accounts people had forgotten about when they switched jobs and accounts that had been frozen by an estate in the aftermath of a death.In other words, the best investors were those who didn't react to the crash -- even if it was because they forgot to or couldn't.It's one more reminder that panicking is not an effective investment strategy. When the market is volatile, caution and objectivity are friends. Fear is the enemy.There are, however, useful actions to consider during turbulent or correcting markets.
Stick with your overall plan, but objectively re-evaluate your holdings. If -- and only if -- you think the long-term outlook of an individual holding has changed for the worse because of market or economic conditions, go ahead and sell it and replace it with something more suitable.
Don't blindly buy the dip. But do start a shopping list. Put a list together of all those stocks and funds you wished you had bought at lower prices. Buy strategically when and if prices tumble. (This is something you should start doing before things go way south. Like, right now.)
Add cash to your investment accounts if you can. Consider making your IRA or Roth IRA contributions earlier this year. Add more money to your regular brokerage accounts. This will give you dry powder to pick up bargains from your shopping list when prices drop.
And whenever the market takes a 10% drop, take a deep breath and remember that market volatility is normal.