Do you remember the Deep Water Horizon? I suppose the release of the Mark Wahlberg movie about the disaster put it back into the forefront of my mind. I remember helplessly watching the footage of oil spewing into the ocean, knowing it would end at some point, but not knowing when.
Those feelings are similar to the feelings I had during the financial collapse of 2008. I remember helplessly watching the 24-hour news cycle for what felt like forever, knowing it would end at some point, but not knowing when. The major difference between those two events for me is I had (and continue to have) no background or knowledge in deep sea oil drilling. In 2008, I had been in the financial industry for seven years, living and breathing the markets every day. But honestly, those seven years didn’t make it any easier.
How did you feel? How did you react? Did you stay the course? Did you invest more money? Did you sell everything and get out? Many people did sell everything and got out of their investments at the lowest point, which proved to be a mistake. The reality is this: if you had stayed the course, you would have enjoyed the unprecedented growth of the past eight years.
Here’s the most important question: what will you do the next time the stock market goes down dramatically? I don’t have a crystal ball, but I do have a time machine. My time machine goes backwards and I can research market cycles. Those market cycles show me that bad markets (Bear Markets) turn into recoveries that turn into good markets (Bull Markets) that eventually go back down and the cycle continues.
I think we all intellectually understand how it works. But it’s not our intellect that gets us into trouble; it’s our emotions. Because we’re aware of the powerful influence our emotions have on our actions, I advocate you prepare in advance.
An Investment Policy Statement (IPS) can provide helpful guidelines to curb emotional responses during bad markets.
When visiting a new destination, it helps to map out the directions. Upon arrival, you decide on an activity plan. If you’re going to a state park for a hike, you determine how to get there and next, which trail to follow at the park. Similar to an expedition, an Investment Policy Statement (IPS) is a guide to your financial future.
Perhaps an Investment Policy Statement is right for you and I’m happy to help you develop one. Either way, the next time the stock market has a negative event, please rely on logic over emotions when making investment decisions.