- Market volatility continued in the second quarter.
- Such volatility can lead to panic and the temptation to act.
- But trying to time spikes of volatility usually does more harm than good.
- For long-term investors who manage to resist this temptation, volatility doesn't much matter.
We've all been there: Standing on the tee and knowing where not to hit our golf ball. A weak fade would be ok, a worm burner down the middle wouldn't hurt, even a big peeling slice into the next fairway would leave you with a shot. Just don't go left on this one. Take the club back (don't go left), top of the swing (don't go left), power on (don't go left)…..and….#@%*&! You went left.
[Snickers from your buddies as you pound your club into ground, hard.]
It'd been such a perfect, wondrous round up till now! Well maybe I can still hit a miraculous recovery shot and keep this Cinderella run intact…
Except there is no such thing as the perfect round. Every card has blemishes after eighteen holes. There were average shots, there were poor shots, and there were great shots. In the end, all that matters is the total.
Great golfers, just like the great investors, understand that in their bones.
Now, you're looking at a terrible lie, a line of majestic redwoods directly in front of you, 195 yards to the green, and a creek along the front. And you can't help but think, Yeah, it's a tough shot…but maybe…maybe if I sky a seven iron as high as I can over those trees, and hit it as hard and clean as I ever have…maybe, just maybe, I can carry that creek and hit the green and preserve this perfect round.
Of course, this is sheer idiocy. The answer, as everyone in your foursome knows, is just to take your medicine, punch your ball back in the fairway, and scramble for par. (Of course, they're all hoping you go for the asinine big sweeping hook. Endless entertainment. Probably hit the beer cart. Eight written all over it. Which would really ruin this good round you've got going.)
Jean Van de Velde hitting into the water at the British Open; Phil Mickelson hitting a driver into the woods at the US Open—both those guys played 71 holes of great golf, got into a little trouble on the final 72nd hole, took a chance on a risky recovery shot, and blew themselves up and lost the tournament. What if they'd just kept the big picture in mind, laid up, and stayed disciplined? They'd likely have won the tournament.
It's similar with stock investing—volatility is part of the game. You can't avoid it if you're looking to keep up with the markets. The real question is what you do when you find yourself smack in the middle of it. After all, when reviewing your statement after a tough month or two, it can be tempting to do something to "save" things. Maybe you should go to cash for a few months. Buy some bonds. Be a genius and make the one move that's going to save this perfect run you've had.
Trying to react to short-term stock market volatility can be like trying to hit a golf shot you can't execute—it will likely do more harm than good. What's more important: That one shot or the overall score? You darn well know the answer: It's the sum total that counts. But we all want to be hotshots, we all want to be portfolio geniuses and we all want that miracle recovery shot.
Your job as an investor is to win the tournament, forget the individual strokes and accomplish your long term goals. One day, one month, one quarter—sometimes even one year—doesn't matter as much as the sum total. If you can manage to resist the temptation and remain disciplined, the wayward drive won't matter much by the end of your round.
Which brings us back to your investments.
June was a particularly tough month, and whether you're online looking at the numbers now or waiting for them in the mail, your reaction will likely be the same. Shouldn't I be doing something about this?
Bear Market Freak Out
By The Mole, CNNMoney
DALBAR (a mutual fund research firm), in study after study, has shown the average investor earns significantly less return than the mutual funds they invest in. How can this be? Because, whether bull or bear market, investment return is far more dependent on investor behavior (switching in and out of funds and strategies) than on fund performance. Their most recent study, which analyzed investor behavior over the past 20 years (thru 12/31/07), concluded the average equity fund investor earned an annualized return of about 4.5%, trailing the S&P 500 by more than 7%.
That's because too many of us go for the big recovery shot, when really, we should have stayed the course and laid up and ensured our longer-term goals.
So, what to do in times like these? Be disciplined. As long as you had the right portfolio (a diversified one, properly aligned with your goals and objectives) before the volatility, it's probably still the right one now. But whatever you do, whether on the golf course or with your portfolio, don't be tempted into the big mistakes. You'll be happier reading your statements in the long run, and someone else will be fodder for the 19th hole.