Wild Wild Week

Last week was a wild, wild week.

For a few days, it was one of those weeks where we were reminded what it feels like to lose money. On Wednesday, we experienced a very rough day in the market. S&P was down 3.29%, Dow down 3.15%, Nasdaq down 4.08%. In fact, it was the worst day in the market since February. Eight whole months – an eternity! Thursday was not any better.

Here comes Friday, with surging stocks and the S&P 500’s biggest gain since April 10. What are we to make of all of this?

If you’re like many, you turned to news outlets to get a better understanding and probably saw things like “Fed policy: crazy or sane?” or “S&P 500 rises for first time in 7 days” but still having “Worst month since March” but at the same time “Nasdaq has biggest jump since March.” By the way, all of the aforementioned headlines came in one 15-minute window on Friday morning. Make sense yet?!

To be blunt, I do not recommend you changing your investment strategy based on what happened last week, this past month, or even this year. If what happened last week has left you in emotional distress, you may need a reality check. Returns are only possible by taking risk. Rather than chasing returns, it’s imperative that you understand the risks you take in your investments.

Arguably the biggest rule about investing is that no one has a crystal ball. Worth repeating – no one can predict what will happen and when. It’s not cliché…it’s reality!

The best remedy for a week or month like we just experienced is having an investment strategy. Whether you are a DIY’er or work with an advisor, you should have a strategy and know what that strategy is well in advance of any shakeups.

However, even when we have reasonable evidence that a particular investment strategy will work, the hardest part is the discipline it takes to stick to that strategy through thick and thin.  It is so difficult because that little voice in your head says, “What if this doesn’t work anymore?  What if I’m wrong? What if my neighbor/friend is supposedly doing better than me?” Often times, that little doubt is all it takes to turn steadfastness into the emotional turmoil that has ruined generations of investors.

The key to successful investing as I see it is two things, listed in order of importance.

  1. Stay disciplined. This requires hard work. It’s easy to be disciplined when everything is going your way, but it’s much harder when the tide is turned against you.

  2. Remain diversified. Over-concentration of investments (to one company, one sector, one asset class, or one country) is one of the top reasons anyone ever ends up bankrupt and has a poor investment experience.

Last week was a wild, wild week. It felt like that 2010 Wimbledon match between John Isner and Nicolas Mahut. You know, the one that started on a Tuesday and ended on a Thursday? Where the 3rd and 4th sets went to a tie-break, and the match finally ended in the 5th set at 70-68. You remember, because it was emotional!