I'm remined of the role of John Travolta that made him a household name- Vinny Barbarino on "Welcome Back Kotter!" Vinny played a C minus student in a NYC high school who spent more time confused than enthused. His tag line, when in over his head was "I'm so confused!" Have you been of the same feeling when watching the markets look like the escalators in the Palisades Mall- some go up, some go down, and more often than they should, some don't go anywhere- they just sit dormant as if they were waiting for the almighty to give them their instructions for direction for the day.
Clearly, the markets lately have been mind-numbingly crazy. I remember the days when a 20-point swing in any direction was a big day- now we see 20-point swings inside of a 5 second timeframe. For those of you who are busy during the day, doing things like working for a living, it's not until you see the evening news do you find out how the market did for the day. For those of you enrolled in a 401(k) or other retirement or investment plan, if you dare to check the balances at the end of the day you are ripping your hair out either trying to figure out the market (don't bother... you can't) or frantically making changes to your allocation. And then there's the third choice- reflect back on your original goals and objectives of the investment, and then make your changes accordingly, of you see it necessary. From my experience of close to 35 years in the investment business, smart, calculated thing sometimes gives way to emotional, irrational decisions- far from the original goals of the investment. Do you find yourself second-guessing yourself based on the evening news?
While investing includes research, analysis, projections and anything else you want to throw into the equation, it also includes memory. Not the memory of how a certain investment had done in the past (past performance is no indication of future performance- future performance can never be guaranteed) but the memory of why you originally made your investment, and the parameters included in the decisions. Sure, there are some instances in life where you must turn to another direction, but is your investment philosophy based on solid, concrete rules you set up for yourself, or is a walk in a Jell-O mold? There are provisions and criteria that usually are utilized for a long term or short-term investment- are you confusing the two? Are you making short term decisions to affect a long-term goal? I'm not saying that market decisions or conditions should be ignored while you pop another Tums in your mouth, but I am saying it's important to review your original thought process for the portfolio make-up you made at the inception of the account-opening, and review it each time you have second thoughts. I often ask clients to rate their financial risk tolerance from 1 to 10... 1 being the least conservative, and 10 being the most. Try it. Where are you on the risk scale? Be honest, and then look at your account statement- are they parallel or are they distant? There is no right or wrong when it comes to risk tolerance- it's different for everybody, and you have the right to yours. I often liken it to a "sleep at night scale." How much risk are you willing to take on before it causes you to lose sleep at night, waking you up at 2 A.M. in a cold sweat. Perhaps this is a way to equate risk with your level of comfort... are your investments waking you up or night, or keeping you up? If so, a re-evaluation of your risk tolerance may be in your very near future.
There are many criteria to include when working on your risk tolerance: the time you have until you need to take withdrawals, tax ramifications, liquidity needs, diversification... and many others that are particular to each and every one of you. The big secret is not to panic. Review your original goals, consult your advisor, and remember... the elevator runs in both directions.
