Most long term investors try not to get caught up in the day to day movements of the market. However, with all of the volatility of late and every business cable television station running night time specials it becomes quite difficult to stay on track.
When it comes to investing human beings tend to be at a disadvantage to computers due to the fact that they tend to let their emotions get involved in the decision making process. Specifically, we act on the same two emotions of fear and greed, which the market operates on.
When the market heads considerably lower in a short period of time we tend to start second guessing our investment philosophy and react to the short term noise. As long term investors we should be looking at temporary pullbacks as potential buying opportunities or possibly a good time to rebalance, but our minds tell us to focus on the present. This shift in psychological sentiment often causes people to sell rather than buy at the lower prices. Computers on the other hand can be programmed to trade off of algorithms so that emotion does not get involved. They don’t allow fear to enter into the decision making process because they simply buy and sell at their respective price points.
Now, let’s take the example of going shopping at your favorite store. You walk in and the entire store is having a 25% off sale! You are probably going to be inclined to purchase more than you might have otherwise. By taking this same approach to investing you can often find bargains in and amongst all of the noise on Wall Street.
Turn the situation around to the upside. When the market is catching a bid and moving higher it becomes very difficult to force ourselves to sell and take profits. Once again, computers don’t experience emotions, thus they may choose to sell at the higher prices. We have all probably told ourselves at some point, “When my position gets back to breakeven, I’m out.” Well, unfortunately volatility may or may not give us that chance.
The moral of the story is to not let your long term investment planning be altered by the day to day movements in the market. However, sometimes it may be prudent to think like the computers and use the momentum swings to go shopping or take profits. As a wise man once told me, “Try and eliminate the emotions from your decision making process.”
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